Nairobi is make-or-break moment for WTO

EU Trade Commissioner Cecilia Malmstrom media conference on TTIP

“If the WTO is to be taken seriously as a negotiating body, it has to be able to keep up with changes in the world economy,” said EU Trade Commissioner Cecilia Malmström | EPA

The credibility of the World Trade Organization could suffer a potentially crippling blow — with real costs for global business — if ministers gathering in Nairobi, Kenya, this week fail to reach agreement on something, anything, related to global commerce.

The meeting pits the interests of developed nations, led by the United States and allies like the European Union and Japan, against those of large emerging economies like China, India, Brazil, Argentina and South Africa. And despite the sharp rise in global tension from chaos in the Middle East and China’s posturing in the South China Sea, officials representing most of the world will get in a room together and try to unanimously agree on something.

In the 20 years of the Geneva-based organization, that hasn’t happened too many times. If countries can’t come together this time, it might spell the end of the consensus-based organization as a meaningful negotiating forum and usher in an era dominated instead by mega-regional deals like the Trans-Pacific Partnership, where the U.S. gets to choose who’s in and who’s out.

“America can’t wait on China and India,” Senate Finance Committee Chairman Orrin Hatch (R-Utah) told POLITICO. “Instead, we should aggressively push for the conclusion of high-standard trade deals with our partners, who are willing to abide by the rules and meet the terms of our agreements.”

In the long run, however, economists and other experts say the proliferation of regional trade deals would heap additional costs and complexities on companies that would have to navigate a complex patchwork of rules depending on where they do business.

“When you have different rules you end [up] paralyzing global trade,” said Derek Scissors, a resident scholar at the conservative-leaning American Enterprise Institute. “The more agreements you have, the more a mess they are.”

The loss of credibility for the global trade body would also undermine an important forum for the peaceful redress of trade conflicts and could deal a blow to international cooperation on other issues.

“It’s always better to have a forum, a legitimate forum, in which problems can be aired and negotiators can address them,” former Labor Secretary Robert Reich told POLITICO.

Doha Round began in idealism

The current negotiating agenda at the WTO, known as the Doha Round, was launched in 2001 as an ambitious effort to make globalization more inclusive and help the world’s poor, particularly by slashing tariffs and agricultural subsidies. But years later, members are no closer to a consensus on the issues, particularly those related to lowering farm subsidies and opening agricultural, manufacturing and services markets.

Member economies originally hoped the Nairobi meeting could mark the conclusion of Doha negotiations, but now ministers are only going to consider small pieces of the round, such as a ban on agricultural export subsidies and improved market access for the poorest countries. Hopes have faded for any new commitments to be more transparent in certain areas.

“Prospects for even this more limited package are very uncertain, even gloomy,” EU Trade Commissioner Cecilia Malmström told the EU parliament’s trade committee on Thursday.

Enter the TPP, and other deals like the Information Technology Agreement, under which some but not all WTO economies eliminate tariffs on high-tech goods like computers and semiconductors. These deals have been born out of the inability of the global trade body to deliver. Coalitions of the willing are now the preferred horse to bet on for multinational corporations, but they have consequences for poorer countries that are left out.

“They have not woken up that this is a different world,” Kim Elliott, a senior fellow at the Center for Global Development, said of developing countries. “If they’re not going to play ball in Geneva, the U.S. and EU will pick up the ball and go play somewhere else.”

The decision on whether to abandon the 14-year-old development talks is central to whether the WTO can stay relevant. From the perspective of the U.S. and other developed and developing economies, Doha has to be pushed to the side so that a wider scope of issues can be addressed.

“If the WTO is to be taken seriously as a negotiating body, it has to be able to keep up with changes in the world economy,” Malmström said. “We are not asking WTO members to start negotiations on new issues straight away. But we do believe that we need open discussions and fresh approaches that could lead to the possible start of negotiations at some point in the near future.”

Reich argued that if the WTO doesn’t deal with issues like currency manipulation, no one will take it seriously as “a legitimate means of dealing with trade.” Currency manipulation is presently considered the purview of the International Monetary Fund.

“The WTO is in danger of being sidelined and its legitimacy as the forum for dealing with trade-related problems is at risk,” he said, also citing the need to talk about issues relating to labor rights and the environment.

U.S. businesses, meanwhile, would like to see the trade body’s agenda cover topics like investment, electronic commerce and government-owned companies.

While these issues get attention in the 12-nation Asian-Pacific trade pact recently negotiated by the U.S. and others, the WTO is the most effective international arbitrator of international disagreements — and regional trade agreements are, at least for the time being, outside its jurisdiction.

Why can’t anything get done?

At the heart of the WTO deadlock is a disagreement over how many obligations — related to tariffs, subsidies, rules and transparency — large, emerging economies should be required to tackle.

Developed economies like the U.S., EU and Japan insist that countries like China, India, Brazil and Indonesia should have more ambitious commitments than other developing countries like Kenya because of their huge economic footprints. Those countries disagree, arguing that their policies must accommodate millions of poor citizens, many of whom are farmers or craftsmen vulnerable to changes in trade policy.

“This idea of trying to divide developing countries … it doesn’t work because you have pockets of poverty in Brazil everywhere,” said a source in the Brazilian government. “I don’t think we’re going to accept that.”

But there are additional dynamics at play. People in developed countries and some developing countries often point fingers at India in particular for holding up progress to score political points at home.

In 2013, the organization’s trade ministers reached their first new agreement since the WTO’s inception — a customs deal aimed at removing red tape at borders. But even that agreement was delayed by New Delhi and only moved forward after the South Asian country was assured twice that it wouldn’t be sued for subsidizing farmers as part of a program in which it buys food at above-market prices and then sells that food cheaply to poor citizens.

“It takes unbelievable courage for an Indian minister … to stand up to the demagogues and to explain how more open trade and more open economic systems can help India,” said Susan Schwab, who served as U.S. trade representative under former President George W. Bush. “So I think it’s domestic politics.”

Others point to China, whose trade-liberalization efforts tend to move at a glacial pace, though Beijing as an export-driven economy is deeply invested in the success of the WTO in lowering trade barriers. Schwab noted that China might also indirectly account for lack of movement by smaller countries which fear a flood of Chinese imports if they lower industrial tariffs.

South Africa, Brazil and others are also sometimes counted as culprits, though they see the U.S. and EU as holding up progress on issues like agricultural subsidies because of their own domestic politics. The U.S, for example, provides billions in subsidies for all its major crops, particularly through a crop insurance program.

To be sure, Geneva-based negotiators say the deadlock is much more complex than simply developing vs. developed countries. They point to the different negotiating stances of the U.S. compared to the EU, or to Japan and to China vs. India vs. Brazil vs. whomever. And that’s not to mention all the other complex dynamics that determine how Turkey might approach an issue differently from, say, Kenya. But fundamentally, the power dynamics aren’t the same as they were in decades past, when developed economies largely dictated the trade agenda.

“Before … a few countries would decide, and other countries would adapt to whatever they decided.” the Brazilian government source said. “Now other countries participate in [the decision-making], so that explains a little bit the stalemate. The developed countries did not adjust to the new reality.”

Still, the U.S. probably has enough clout to unstick the WTO, AEI’s Scissors argued. He said if the U.S. told other countries directly to “put up or shut up,” or they’ll focus instead on talks with the European Union and adding countries to TPP, it would get results. “People are underestimating the centrality of the U.S. to this,” he said. “We can coerce everybody.”

But Matt Goodman, who worked at the White House on economic issues during President Barack Obama’s first term, argues the administration put the WTO first when it took office. “If you could achieve a comprehensive, substantial package of liberalization, that would be easier probably to sell than a narrower agreement, whether with Korea or with 11 Asia-Pacific partners. They understood multilateralism was the first, best outcome.”

He pointed to the “breadth and diversity” of the WTO membership as an explanation for why agreements are so difficult to reach.

TPP supporters also hope that that deal, rather than serving as a death knell for the global trade body, could be a wake-up call to other WTO members and encourage them to make compromises for fear the U.S. will lose all interest. The U.S. has made clear that without a new agenda, that is exactly what will happen.

“Nairobi is a moment of truth,” John Murphy, senior vice president for international policy at the U.S. Chamber of Commerce, wrote in a blog post this month. “If we’ve accomplished all we can under the Doha mandate, WTO members should say so, and bring the curtain down on it. Then we can consider a new agenda for the rapidly evolving global economy.”