The WTO has just finished another ministerial meeting. One can be sure nothing or very little will come of it. There’s a very strong reason for this.

Before the formation of the World Trade Organisation (WTO) in 1996 international trade rules were made and administered by a body called the General Agreement on Trade and Tariffs (GATT). It had been formed in 1948 to encourage trade and prevent protectionism.

This was done to prevent a repeat of the 1930s when widespread protectionism was seen to be a major factor contributing to the Great Depression because large scale protectionism shrank world markets and led to unused capacity.

The economics behind it all was straightforward. Things are made by combining capital and labour. The West, which ran the world then, said to the non-West “We have the capital which includes technology and you have the labour. Take our capital that is embedded in our goods but keep your labour.” This logic persists even today.

But India and China have gone around it in their own ways. India exports labour by embedding it in services and China exports goods by embedding its cheap labour in them.

So for the last 20 years there has been an ongoing tussle between the West and the non-West to gain the upper hand in trade access. However, despite the efforts of the WTO, it has been a stalemate. Trade-wise, therefore, the world is in a cul de sac.

Everyone is now negotiating from a position of weakness, which is bad because it results in an inbuilt incentive to break fairness rules. That is, everyone cheats by whatever means they can and tries to obtain more than a fair share. It’s like ticketless travel: high returns and low penalties if you are caught.

The cheating game

Free trade agreements are exactly that. And they are proliferating because they are beneficial and allow participants to hide behind the thick curtain of sovereignty. They also legitimise the trading interests of the bigger economies.

So the big fish eat the small ones and, astonishingly, the small fish don’t mind, at least not very much. For example, look at Canada and Mexico who, along with the US, are members of the first FTA signed in 1993, NAFTA. Despite grumbling Mexico and Canada are still members.

This is the main reason why multilateral trading rules will simply wither away unless the WTO is reformed. But the question is how.

Should the answer come from politics or law or economics? If all three, as would be sensible, which of them should have primacy?

When GATT started it was premised on economics, specifically, the theory of comparative advantage. The law was based on fairness, and politics was kept out.

Over the years, politics has taken over and now uses the laws/rules to gain whatever short term ends are needed to be achieved. Economics has gone out of the window and comparative advantage has been given a quiet burial.

That’s why the WTO’s exhortations lack credibility now. No one pays much attention to them. It’s like a test being administered in a rowdy school. The candidates cheat with impunity while the invigilator mumbles on and on.

Thus, in many ways, the WTO has become like the UN. It is important as a forum but of marginal usefulness in real situations because the US formed all those little military groups like NATO, SEATO, CENTO etc.

Back to basics

The question, as we near the end of the first quarter of this century, is whether it’s worth saving the WTO. The answer must begin with another question: as its predecessor GATT did, has the WTO served any major purpose?

Examine it dispassionately. You will find that in the 38 years of its existence, GATT managed to open up world markets to pre-world war one levels. In the 28 years of WTO since 1996, the world has slowly gone back to the post-world war two approach to trade. It’s been an unmitigated disaster.

And this has happened because comparative advantage has shifted away from the West to the non-West, which has responded foolishly, as in the case of high caps for agricultural subsidies, to name just one example. That is, the shift has led, paradoxically, to the breakdown of the multilateral trading system that GATT had created.

Personally, I think the WTO can’t be saved. It was flawed in conception and worse in execution. Altogether the best thing would be to just shut it down.

In its place should come an organisation that brings together trading blocs as members. Then everyone can negotiate from a position of strength, which will reduce the incentive to cheat and increase the incentive to cooperate.