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  Félix Peña

INTERNATIONAL TRADE RELATIONS NEWSLETTER
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THE THREE LEVELS OF THE WORLD TRADE SYSTEM
A dynamic, complex and inevitable interaction

by Félix Peña
May 2009

English translation: Isabel Romero Carranza


 

The interaction between the three levels of the world trade system (national, regional and trade preferential, and global multilateral) is relevant for the elaboration and implementation of public policies in each country as well as for business strategies, particularly of those firms exposed to international competition.

Furthermore, it is relevant for the efficiency, at the global multilateral level, of the WTO system and for the Doha Round negotiations.

Issues related with the dialectic tension between those three levels are currently important for the world trade system and, in particular, for the WTO. The idea of the predominance of one level -for example of the global multilateral one- over the others may correspond with theoretical and ideological views. In reality, this is not the case today and it is improbable for this to happen unless there is an effective centralization of world power, something that seems highly unlikely at least from what can be foreseen from the current international situation.

A more realistic approach is to strive to achieve criteria, outlooks and mechanisms that will, at least, enable to preserve a reasonable balance between the three levels, a balance that will most likely be characterized by instability. The preservation of such an unstable balance will require simultaneous work on each of the three levels and its interactions.

It is possible to foresee that the new realities will drive all those involved - governments and companies -, for their own interest, to strive for institutions and rules of the game that guarantee flexibility and predictability at the same time. It is expected that these will enable to develop strategies adapted to a world that will increasingly offer multiple options for the international insertion of nations and firms.


The regulatory framework of the system of world trade is the result of principles (that sometimes reflect cultural and ideological differences); institutions (especially as spaces for negotiation, creation of rules of the game, collective disciplines and solution of conflict) and rules (both formal and informal, including tacit understandings), that arise from the interactions of the three levels of the world trade system.

As is well known, such levels are the national, the regional (including that of trade preferential agreements) and the global multilateral level. The dialectic tension that results from the interaction of these three levels is inevitable (unless a country chooses to close down completely to the external environment); extremely dynamic (its scope and intensity are constantly changing); and relatively complex to manage (given the extent and diversity reached by the international exchange of goods and services and its financing).

The interaction between the three levels is relevant for the elaboration and implementation of public policies in each country, as well as for business strategies, particularly of those firms exposed to any kind of international competition.

Additionally, said interaction is relevant for the efficiency, in the global multilateral level, of the WTO institutionalized system and of any negotiations that are carried within it, specifically for the Doha Round. The debate over current trends and modalities of protectionism has made this fact evident (with regard to this matter, please refer to our January, February and March 2009 Newsletters).

It should also be considered that, as long as the rules (be they national, preferential or global) seep into reality, becoming effective, they can have an impact on the direction of the flows of goods and services, of capital and technology, through nations and their jurisdictions. In fact, they might even prevent them. This is the reason why they are one of the key factors to take into account, when making rational investment decisions and threading the dense weave of transnational production and supply business networks that currently characterize international trade relations.

As for global multilateral rules (and given the case, the regional and preferential ones) their role is, additionally, to contribute to the increase of world trade, to the economic development of nations and to the generation of mutual gains for those involved. In actual fact, many times these goals are not achieved, at least in the measure of expectations. On the contrary, throughout history there are alternate cycles of expansion and contraction of market globalization and especially steep differences in the distribution of the benefits of world trade, either among the different nations as well as within each one of them.

Principles, institutions and rules are the result of a long process of experience gathering throughout the centuries, many times of a negative kind. This is a process that, almost in slow motion at first and in a more accelerated manner during the last decades, but always with advances and setbacks, has increased the connections between the different national markets and their capacity to produce and consume goods and to offer and use services, be it within as well as amongst the multiple regional geographic spaces. This is an economic and political connectedness, which today has a universal outreach but which still shows a marked disparity in its geographical distribution.

The result of such process is a world trade system with increasingly intense interactions, with differences in its regional expressions and which has become more decentralized, in the sense that the concentration of relative power in a few dominant centers tends to be diluted.

Any intellectual exercise aimed at understanding the regulatory framework of the world trade system should begin by acknowledging a first level of action, the national one, which is the result of policies and preferences of sovereign protagonists - what we know today as nation states. Currently they have become more numerous, although the distribution of power between them is still unequal and might always be so. Such inequality has its roots, among other factors, in the difference of size (territory and population); geographical location; level of social and economic development; endowment of productive resources and aptitude for the creation of technical progress.

All these factors condition the possibility, or even the will, which each protagonist might have of exerting power upon the others. Additionally, these factors create differences in the real capability that each nation might have to influence the definition of the rules of the game of world trade.

However, these are factors that are exposed to a strong change dynamic. This is the reason why the relative power of nations in the regional geographic scenarios and the global arena has been subject to continuous mutations throughout time. The current and deep transformations of world power and its distribution among a growing group of countries are, in this sense, a relevant undertone to the present global crisis and will have strong repercussions for international trade and a yet uncertain outcome.

National rules are the ones that have a direct impact on market access conditions and costs. They are the result of policies and regulatory frameworks that reflect the specific interests of the respective social actors, as well as cultural preferences and dominant ideological concepts of a given nation. Most importantly, they are the result of the perception of power that a nation has or believes to have and, as such, of its ability to affect the scope and the conditions of the relations with other nations and their respective markets.

It was from their corresponding national spaces that countries gradually built the rules of the game and later the international institutions that nowadays are main components of the world trade system. For a long time in its history, this construct was expressed through bilateral or multilateral agreements that always had a partial reach in terms of the involved countries. Different mechanisms were generated that were geared towards an opening of the markets or at least towards preventing any discrimination amongst the involved countries in regards to the prevailing conditions for entry. Thereof, one of the very first rules that were agreed at a transnational level was that of the "most favored nation clause" in its different modalities.

The increase in connectedness between the main markets, evinced during the last two centuries, as well as the devastating effects of the protectionist experiences that followed the great crisis of the thirties finally led -after the last World War- to a growing development and interaction between the two other levels which, together with the national one, give shape to the current system of world trade.

One of such levels is, precisely, the global multilateral one institutionalized through the GATT-WTO system, with its sixty years of evolution. As is well known, the non-discrimination principle is one of its central points, expressed by the most-favored-nation-treatment of article I of the GATT. Together with the consolidation of what each country grants to the others, these provide the system -at least in the regulatory aspect- with an expectation of a relative potential for stability and a relevant insurance against discrimination and protectionism. With the evolution experienced after the Uruguay Round by the mechanism of dispute settlement within the WTO, this global multilateral system has reinforced its tendency to be rule-oriented, increasing thus its political and economic value and its standing as an international public good.

The other level is that of the different trade preferential spaces. These result either from regional governance strategies (as are the cases of the European Union and the Mercosur, among other relevant examples), or from strategies for the international projection of the trade interests of nations or groups of nations (such as the multiple existing bilateral and multilateral trade preferential agreements) that are supposed to be consistent with the GATT's and GATS principles and rules.

The proliferation of such agreements of partial reach -meaning that they do not encompass all WTO members- has intensified during the last years. It has given rise to the creation of different types of preferential agreements. Some are what can be called regional agreements in the strictest sense, with a clear goal of contributing to the governance of the corresponding regional geographic space. Others, instead, have materialized between distant countries. These are the preferential trade agreements, whatever their modality or denomination.

Two common traits can be noticed in all of them. They answer to explicit or implicit political objectives and they are discriminatory in relation to the main principle of the-most-favored-nation-treatment institutionalized by the GATT-WTO. Increasingly, they also include non-preferential elements as well, that do not imply exceptions to the abovementioned principle of non-discrimination.

The proliferation of agreements may even increase if the Doha Round is not completed or if no reforms to the global multilateral system are also introduced.

Issues related with the dialectic tension between the abovementioned levels are currently relevant for the world trade system and, in particular, for the GATT-WTO. The idea of the predominance of one level -for example of the global multilateral one- over the others may correspond with theoretical and ideological views. In reality, this is not the case and it is unlikely for it to happen unless there is an effective centralization of world power, something that seems highly improbable at least from what can be foreseen from the current international situation.

In practice, and probably for a long period of time yet, the national level will continue to be the fundamental one. It is through this level that each nation -whatever its relative power- will eventually be able to place the other two levels in the perspective of its own interests, its strategies and its possibilities.

Hence, if a nation lacks a correct definition of its interests and an effective strategy to develop them by using to its advantage what can be obtained from the other two levels, it will have less possibilities of obtaining what it needs from the trade interaction with the rest of the nations. The same can be said for a country that has an incorrect assessment of its possibilities for action, in particular as a consequence of a wrong appraisal of the real value of its contribution to other countries and their markets.

However its is through the two remaining levels that it will be necessary to create, in the future, institutions, working methods and rules of the game that enable to complement them and, if possible, neutralize the effects of their eventual incompatibilities.

Different authors, especially during recent times, have made useful contributions towards the explanation and understanding of the dialectic tension between the three levels that form the system of world trade. These are helpful in particular for those who need to operate on global realities from their national perspective, be it through the creation of public policies as well as through the development of visions and negotiating strategies. They are also useful in the case of those firms which strive for a competitive insertion of their goods and services in the global and regional markets, particularly when acting through the wide range of transnational productive and commercial networks.

Three recent books deserve to be mentioned, among others, for their valuable expositions and contributions. The first of them is by Richard Baldwin and Patrick Low (editors), (see the reference in the Recommended Readings Section of this Newsletter). The other is by Simon Lester and Bryan Mercurio (editors), ("Bilateral and Regional Trade Agreements Commentary and Analysis". Cambridge University Press, Cambridge 2009). And finally is the book by Tatiana Lacerda Prazeres, with a substantial foreword by Pofessor Celso Lafer ("A OMC e os Blocos Regionais", Aduaneiras, Sâo Paulo 2008).

Its analysis and contributions prove especially relevant from the point of view of an attempt to better understand and manage the interaction between the three mentioned levels. An interdisciplinary outlook is required for such purpose, one that merges the logic of power, welfare and legality. Without such combination it will become difficult to attempt to decode reality, a fact that is well known by those who have been involved with the practice of international trade relations.

Precisely, one of the main contributions of Tatiana Lacerda Prazeres' book is her analysis of what is customary presented as an excluding dichotomy between global multilateralism and preferential regionalism, a relation which is viewed as complementary by some and as antagonist by others. The author rightfully argues that the relation is simultaneously complementary and antagonist. The same could be said if the national level were to be included in the relation.

In this regard, what is important is to identify the different factors that can have the strongest impact, either positive or negative, on the predominance of complementarity or antagonism in order to achieve a reasonable balance between them. This is the central point of the author's contribution.

With good reason, the author identifies time as one of the main factors to explain the trend to develop preferential trade agreements -particularly when these are unrelated to governance strategies of regional geographic spaces-. In this sense, it has been observed in the case of the Doha Round that the main costs in the global multilateral level, especially the local political ones, are incurred in the short term, whereas the benefits only begin to show in the mid and long terms. This fact has caused a growing number of countries -and its businesses- to attempt to move forward through agreements of partial outreach, thus conforming at times preferential trading networks in connection with a particular country.

Quite accurately, the author points out, however, that trade regimes are just one of the components that determine the dynamics of world trade. She identifies the main ones as being the transition from the industrial to the knowledge society; the technological development in the areas of transportation, communication and logistics; the trade within and among firms; the intensification of the globalization of financial markets, and the proliferation and strengthening of transnational productive chains.

In search of a reasonable balance, it would be essential to work simultaneously on the three levels that form the world trade system. In any case, this would be an unstable balance, exposed to the effects of the dynamics of change of global economic competition and the international political system itself. The existing uncertainties over the future -which are currently accentuated- allow us to foresee, precisely, the constant instability of any balances that are achieved. The ability to continuously adapt to new realities will become, then, one of the required aspects of the regulations and institutions of the system of world trade.

On the national level the essential goal will be to preserve, in the main protagonists, the favorable vision towards the continuity of international cooperation especially resulting form the interest of governments of ensuring the predominance of peace and political stability, both at a global scale as well as in their own geographical regions.

Said interest will be reinforced by firms -more numerous each day and originating in emerging economies as well- which are present in multiple markets. They will demand that governments develop and preserve the conditions to safeguard the smooth flow of their supply chains, taking advantage of the benefits that are emerging today all around the world. Firms are required to export and import to and from multiple markets at the same time. Hence that the internationalization of the capacity to produce goods and provide services has become a main factor in favor of the articulation between the three levels of the system of world trade.

In the regional and preferential trade levels -where there are no single models on how to approach the corresponding agreements- and in the multilateral global level, the new reality in the distribution of world power, with its impact on international economic competition, as well as the results of the different forms of transnational productive integration, will become the source of a demand for creative adaptations in the outlooks and in the specific rules of the partial agreements, as well as in those of more general nature of the GATT-WTO system. An acceleration of the obsolescence of the regulations, mechanisms, work methods and institutions originated in previous stages of the international reality can be observed in both levels.

It is possible to foresee that the new realities will drive all those involved -governments and businesses alike- for their own interest, to strive for institutions and rules of the game that ensure flexibility and predictability at the same time. It will be expected that these enable the development of strategies that are adapted to a world that will increasingly offer multiple options for the international insertion of countries and businesses.

This will mean a review of the WTO regulations, particularly of article XXIV of the GATT and the Enabling Clause. These are, as well, regulations that were born in international contexts that have now been overcome by the new realities. In the future, the transparency of the corresponding agreements will be an essential factor to build mutual trust among the different participants of the global economic competition.

It should be highlighted as well that the recent trend towards innovative forms of protectionism, even when different in scope from that of the 30's crisis, constitutes an alert for those who value the preservation of a world trade system functional to global governance. These forms of protectionism imply the risk of weakening the safety nets against protectionism and discrimination that have taken so much to develop during the last decades. The trend toward the indiscipline proliferation of preferential trade agreements may, in that sense, contribute to this weakening if it takes place within the framework of a GATT-WTO system that loses its effectiveness and legitimacy. In such case the problem would be not the proliferation per se, but the inadequacy of the necessary collective disciplines in which that trend is settled.

This is a forewarning that should lead not only to the conclusion of the current Doha Round but also, to the review of many of the regulations and institutions that enable to preserve and increase the connectivity between the multiple markets, while protecting the non-discrimination principle as a necessary condition, although insufficient, for the pursuit of the prized objectives of progress and economic development of every country.

In our opinion, such revision should take priority in the WTO agenda during the newly initiated four year mandate of its experimented Director-General, Pascal Lamy (please refer to his presentation before the WTO General Council of April 29, 2009 on WTO site).


Recommended Readings of Recent Publication:

  • Baldwin, Richard; Low, Patrick (editors), "Multilateralizing Regionalism. Challenges for the Global Trading System", World Trade Organization - Graduate Institute for International and Development Studies, Cambridge University Press, Cambridge 2009.
  • CARI, "El Nuevo Corredor Bioceánico", Informe Final del Seminario sobre "El Nuevo Corredor Bioceánico, Consejo Argentino para las Relaciones Internacionales, November 24, 2008.
  • CEPAL, "La reacción de los gobiernos de las Américas frente a la crisis internacional: una presentación sintética de las medidas de políticas anunciadas hasta el 31 de marzo de 2009", (LC/L.3025), Comisión Económica para América Latina, Santiago, March 2009, on this site.
  • CUTS International, "Multilateralism will reinvent itself in a more resolute avatar", A Report of the Proceedings of CUTS-FICCI Conference on "Global Partnership for Development: Where do we stand and where to go?" New Delhi, August 12-13, 2008, CUTS International, Jaipur 2008, on: http://www.cuts-international.org.
  • Dadush, Uri, "Resurgent Protectionism: Risks and Possible Remedies", Carnegie Endowment for International Peace - Policy Outlook, March 2009, on this site.
  • ESCAP, "Navigating Out of the Crisis: A Trade-led Recovery. A practical guide for trade policymakers in Asia and the Pacific", (ST/ESCAP/2538), United Nations Economic and Social Commission for Asia and the Pacific, Bangkok 2009 on this site.
  • ESCAP, "Emerging Trade Issues for Policymakers in Developing Countries in Asia and the Pacific", Studies in Trade and Investment, nº 64, Economic and Social Commission for Asia and the Pacific, Bangkok, February 2009, on: http://www.unescap.org/tid/publication/tipub2526.pdf.
  • Giacalone, Rita (editora), "La Integración Sudamericana: un Complejo Proceso Inconcluso", Facultad de Ciencias Económicas y Sociales, Universidad de Los Andes, Mérida 2008.
  • International Monetary Fund, "World Economic Outlook - April 2009 - Crisis and Recovery", World Economic and Financial Surveys, Summary Version, IMF, Washington, April 2009, on: http://www.imf.org.
  • Izquierdo, Alejandro; Talvi, Ernesto (coordinators), "Policy Trade-offs for Unprecedented Times. Confronting the Global Crisis in Latin America and the Caribbean", Inter-American Development Bank, Washington 2009, on: http://www.iadb.org.
  • Kawai, Masahiro; Wignaraja, Ganeshan, "The Asian "Noodle Bowl": Is It Serious for Business?", ADBI Working Paper Series, nº 136, Asian Development Bank Institute, Tokyo, April 2009, on this site.
  • Motta Veiga, Pedro da; Polônia Rios, Sandra, "The rising importance of sustainable development in the South American Agenda", Trade Knowledge Network, International Institute for Sustainable Development, Winnipeg, Manitoba 2009, on http://www.iisd.org.
  • Rafi Khan, Shaheen (editor), "Regional Trade Integration and Conflict Resolutions", International Development Research Centre, Routledge, London and New York 2009, on: http://www.irdc.ca/openbooks/414-7/.
  • UNCTAD, "The Global Economic Crisis: Systemic Failures and Multilateral Remedies", Report by the UNCTAD Secretariat Task Force on Systemic Issues and Economic Cooperation, New York and Geneva, 2009, on http://www.unctad.org.
  • Wiarda, Howard, "Nation-Building", en Issues in Foreign Policy, Comparative Politics and International Affairs, Department of International Affairs, University of Georgia, Athens, GA, May 2009.
  • World Economic Forum-Fundaçâo Dom Cabral, "The Brazil Competitiveness Report 2009", WEF, Geneva 2009
  • World Trade Organization, "Trade Policy Review - Report by the Secretariat - European Communities", WTO, Trade Policy Review Body, WT/TPR/S/214, Geneva, 2 March 2009, on: http://www.wto.org.

Félix Peña Director of the Institute of International Trade at the ICBC Foundation. Director of the Masters Degree in International Trade Relations at Tres de Febrero National University (UNTREF). Member of the Executive Committee of the Argentine Council for International Relations (CARI). Member of the Evian Group Brains Trust. More information.

http://www.felixpena.com.ar | info@felixpena.com.ar


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