PIIE Blog | RealTime Economic Issues Watch
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
Subscribe to RealTime Economic Issues Watch Search
RealTime Economic Issues Watch

The WTO Needs Less Democracy, Not More

by | January 14th, 2013 | 02:49 pm
|

In the Financial Times today (January 14), I argue that multilateral trade as we know it could soon become history. In the past, we have seen regional trade agreements between large and small countries. Now for the first time, we are seeing the prospects of regional trade agreements between the major trading nations: the United States, Europe, Japan, and China.  This would correspondingly weaken the World Trade Organization (WTO) which oversees multilateral trade.

As part of the response, I argue that the WTO’s governance needs to be de-democratized by reducing the effective veto that any of the organization’s 157 members can wield. This would allow negotiations to proceed in the future among the larger nations. Essentially the WTO has sacrificed effectiveness because of acquiring too much legitimacy.

It is tempting to contrast this with the International Monetary Fund (IMF), which has wielded power successfully but at the expense of being perceived as not democratic enough, because effective veto power resides with the United States and Europe, which are progressively accounting for a smaller share of world economic activity.

But that perception is misleading in one important respect. The IMF has been selective in using its clout. It is “effective” only in relation to countries that have borrowed from it. In this context, the IMF has been able to get borrowing countries to change their policies. In relation to economic ties between the large countries, however, the IMF has been totally ineffective: No major industrial nation has ever changed its policies because the IMF has asked it to do so. (My late colleague Mike Mussa famously said that the major countries had essentially signed a mutual nonaggression pact in the IMF, never willing to change their own policies and never requiring change of others either). This has been true not just after 1973 (when the Bretton Woods system of fixed-but-adjustable exchange rates was abandoned) but before that too when the major countries flagrantly violated the requirement not to adjust their exchange rate pegs without discussing them in the IMF.

In contrast, the WTO has been very successful in facilitating cooperation between the major countries. A lot of the trade liberalization by these countries has been under the auspices of the General Agreement on Tariffs and Trade (GATT, which is the WTO’s predecessor before 1994). Why this has been the case and why the IMF can never really be a forum for successful cooperation is explained in greater detail in my book, Eclipse: Living in the Shadow of China’s Economic Dominance (the relevant section can be downloaded [pdf] here).