WTO 2.0

Richard BaldwinGraduate Institute, Geneva & University of Oxford

11 March 2013, WTO Secretariat, Geneva

Paradox• WTO nations keep joining, but liberalisation

happens everywhere but Geneva.• Solution:

– WTO is fine for 20th century trade governance; – Becoming irrelevant for much of 21st century trade

governance.

My argument• Globalisation changed

Trade changed: “21st century trade” New demand for trade disciplines New political economy of liberalisation

• WTO did not change Governance shifted away from WTO

• Mega-regionals creating parallel governanceFragmented & exclusionary system possible/likely

run by old Quad (US, EU, Japan & Canada)

• What can be done?

Globalisation changed

1991, 52%

20%

30%

40%

50%

60%

1948

1953

1958

1963

1968

1973

1978

1983

1988

1993

1998

2003

2008

Source: WTO database

G7 world export share

1950, 55%

1988, 67%

45%

50%

55%

60%

65%

70%

1948 1958 1968 1978 1988 1998 2008Source: World Databank from 1960; Maddison pre-1960

G7 world GDP share

Bay BBay A

Bay C

Steam revolution

1st unbundling: transportation cheaper

Bay B

Bay A

Bay C

ICT revolution

Bay BBay A

Bay C

2nd unbundling: transmission cheaper

1) Dispersion of production stages.2) Regional clustering (Factory Asia)Coordination constraint eased, butFace-2-face constraint binds.

1) Global dispersion of production. 2) Local clustering into factories.Transportation constraint eased, but coordination constraint binds.

Trade changed

Bay B

Bay A

Bay C

Bay B

Bay A

Bay C

Bay B

Bay A

Bay C

21st century trade = 1) Two-way flows of goods, know-how,

investment, technicians & services; “The nexus”.

2) Firm’s tangible & intangible assets abroad; “offshoring”.

20th century trade = Goods crossing borders

20th: Trade system for selling goods

21th: Trade system for making goods

New governance demands

7

Bay B

Bay A

Bay C

1) Seamless supply chains (supply chain disciplines):Intermediates tariffs, NTBs, transportation & ICT infrastructure, service barriers, business mobility, etc.

2) Doing business abroad (offshoring disciplines)“Behind the border barriers” (BBB) reform, property rights, local business climate, capital mobility, competition policy, SOEs, etc.

New political economy• 20th century trade = Selling things.

– Political economy = exchange of market access.• 21th century trade = Making things.

• Developing nations industrialise by joining a supply chain, not building one.

– Protectionism becomes destruction-ism• Offshoring killed import substitution.

– Political economy = Northern factories for Southern reforms.

• NB: No factories on offer in Geneva

• China is different: ‘My market for your factories & technology’

WTO did not change,Governance shifted away from WTO

• Supply chains tend to be regional, so governance response tends to be regional.– Deep RTAs, BITs, unilateral pro-biz reforms.

• Deep RTA = trade agreement + offshoring agreement.

Mega-regionals• Political economy is more asymmetric:

– Hi-tech HQ nations vs factory nations.• Mega-regionals:

– TPP, EU-US, EU-Canada, Japan-EU, Canada-Japan – Old Quad + offshoring partners.– Tentative prediction: China, India, Brazil won’t

join.• Trajectory of world trade governance

– WTO pillar for 20th century trade– Fragmented & exclusionary pillar for 21st century

trade (Quad de facto in charge).

ERGO• The WTO’s future:

– A) Stay on the 20th century side track;• Allow fragmentation of global trade governance &

exclusion of some major WTO members.

– B) Seek to multilateralise the new supply-chain-trade disciplines.

Case for WTO 2.0• Nature of 21st century trade disciplines is

different (supply-chain and offshoring disciplines).

• Nature of international organisation different too.

WTO 1.0 & 2.0 logic• WTO 1.0 logic (help sell goods):

– Enable & lock in exchange of market access & prevent obvious ‘cheating’ on market opening (subsidies, etc.).

– Win-win, all sell more.

• WTO 2.0 logic (help make goods):– Help developing nations commit to supply-chain

and offshoring disciplines.– Win-win, hi-tech firms more competitive, low-

wage nations industrialise rapidly.

WTO 2.0 structureProvocative conjectures• S&D: No special & differential treatment for

supply-chain and offshoring disciplines.• Membership: No clear logic for universal

membership & complexity argues for more limited membership.– ?“World industrial supply-chain organisation”

• Coverage: Intermediates tariffs to zero, Beyond TRIPs, Beyond AD/CVM, Beyond Customs cooperation, GATS, TRIMs, Investment, Capital Movement.

Conclusion• Doha deadlock + Mega-regionals are likely to

transform world trade governance.• Need to start thinking ahead about shape of

global trade governance.• My paper contain many

assertions/conjectures where reasonable people disagree.

• My goal is to provoke more/clearer thinking on where WTO is going.

Thanks for listening• My CEPR Policy Insight “WTO 2.0”:

– Summary on VoxEU.orghttp://www.voxeu.org/article/wto-20-thinking-ahead-global-trade-governance(link to PDF on this page)

17

2 types of trade, 2 types of institutions

20th century trade

20th century trade: Goods made in one nation sold in another

21st century trade: “Nexus”: International flows of goods, services, capital, know-how, managers, technicians

Baldwin (2012). “WTO 2.0”, CEPR Policy Insight

Which issues for WTO 2.0?Revealed preference evidence from RTAs (share with given provision)

Source: WTO database on RTA provisions

0% 50% 100%

AgricultureAnti-Corruption

Approximation of LegislationAudio Visual

Civil ProtectionCompetition Policy

Consumer ProtectionCultural Cooperation

Data ProtectionEconomic Policy Dialogue

Education and TrainingEnergy

Environmental LawsFinancial Assistance

HealthHuman Rights

Illegal ImmigrationIllicit Drugs

Industrial CooperationInformation SocietyInnovation Policies

InvestmentIPR

Labour Market RegulationMining

Money LaunderingMovement of Capital

Nuclear SafetyPolitical Dialogue

Public AdministrationRegional Cooperation

Research and TechnologySME

Social MattersStatisticsTaxation

TerrorismVisa and Asylum RoW legally

enforceable

EU legallyenforceable

Japan legallyenforceable

US legallyenforceable

Visa

IPR

Movement of capital

Investment

Which issues covered in WTO 2.0?Revealed preference evidence from US RTAs (share with given provision)

0% 80%AD

CustomsCVM

Export TaxesFTA Agriculture

FTA IndustrialGATS

Public ProcurementSPS

State AidSTETBT

TRIMsTRIPs

AgricultureAnti-Corruption

Approximation of…Audio Visual

Civil ProtectionCompetition Policy

Consumer ProtectionCultural Cooperation

Data ProtectionEconomic Policy Dialogue

Education and TrainingEnergy

Environmental LawsFinancial Assistance

HealthHuman Rights

Illegal ImmigrationIllicit Drugs

Industrial CooperationInformation SocietyInnovation Policies

InvestmentIPR

Labour Market RegulationMining

Money LaunderingMovement of Capital

Nuclear SafetyPolitical Dialogue

Public AdministrationRegional Cooperation

Research and TechnologySME

Social MattersStatisticsTaxation

TerrorismVisa and Asylum

US LE frqUS AC frq

Provision in WTO 1.0 but deeper commitments in the RTAs

Provision not in WTO 1.0 (maybe in WTO 2.0)

Legally enforceable

Legally enforceable

Source: WTO database on RTA provisions

Ditto for US, Japan, EU & RoW

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RoW ACfrq

RoW LEfrq

US Japan

EU All others

80%

At least 2/3rd of US & Japan RTAs have legally binding provisions

• Tariffs to zero, • Beyond TRIPs, • Beyond AD, • Beyond CVM, • Beyond Customs cooperation, GATS, TRIMs, • Investment, • Movement of Capital.

Membership & SDT• Successful IOs turn lose-lose into win-win.• Institutions & rules depends on the basis for

cooperation.• GATT:

Exploitation GATT

Smoot-Hawley ExploitationHigh

Low

High LowT a r i f f s

T a

r i f

f s

Nation A

Nation B

GATT answers• Spillovers global, so membership global.• Cooperation disciplines selfish behaviour, so

SDT is a ‘gift’ and thus sensible politically and morally.

Universal membership• WTO 1.0 logic: free market most efficient

– non-discrimination with universal members is natural implication.

• Supply-chain trade is more highly concentrated and not a ‘free market’ outcome.

• Logic of universality is weaker.• Politics suggests membership only for those

heavily engaged in supply-chain trade.

WTO 2.0 answers• Very different basis of cooperation

Rip off

Strict

Lax

Engage Don’t engageAdvance-tech firm choices

Deve

lopi

ng n

atio

ngo

vern

men

t cho

ices

Supply-chain industrialisation

No supply-chain industry

No supply-chain industry

Membership & SDT• Spillovers not global, so logic of universal

membership is weak.– Start big supply-chain traders.– Most WTO members not involved in supply-chain

trade.

• SDT should not be included.– 1) SDT defeats the purpose of the cooperation

(protectionism is destruction-ism);

Implications• But why multilateral?• Network externalities

– 1) Better for MNCs – 2) Better for developing nations in supply chains

• Less lock-in to one high-tech partner

– 3) Better for nations wanting to join a supply chain

The big SCT exporters

Why new organisation? WTO 2.0• Existing WTO is not suited;

– Universal membership;– SDT in the ‘DNA’;– Most members have not ‘stake in the supply-chain

game’.

WTO 2.0 & WTO 1.0 relationship?• International law issues

The tight geographical clustering of manufactures export swings

Global supply-chain trade, 2009

Source: Baldwin and Lopez-Gonzales (2012).

2009

UK

Ger

man

yFr

ance

Italy

Aus

tria

Bel

gium

Bul

garia

Cyp

rus

Cze

ch R

Den

mar

kSp

ain

Esto

nia

Finl

and

Gre

ece

Hun

gary

Irela

ndLi

thua

nia

Luxe

mb

Latv

iaM

alta

NL

Pola

ndPo

rtuga

lR

oman

iaSl

ovak

iaSl

oven

iaSw

eden

Turk

eyR

ussi

aB

razi

lIn

dia

Taiw

anC

hina

Aus

tralia

Japa

nK

orea

Indo

nesi

aU

SM

exic

oC

anad

aR

oW

UK 82 2 1 1 1 2 1 2 1 2 1 1 1 1 1 12 1 22 1 5 4 1 1 1 1 1 2 0 0 0 0 0 0 0 0 0 0 0 0 1 1

Germany 2 79 3 2 10 5 2 2 8 5 2 3 3 3 9 2 3 6 2 3 4 5 2 4 6 5 3 2 1 1 0 1 1 0 0 1 1 0 1 1 2

France 1 1 84 1 1 3 1 1 1 1 2 1 1 1 2 2 0 4 1 3 1 1 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 1

Italy 1 1 1 85 1 1 1 3 1 1 1 1 1 3 1 1 1 4 1 7 1 1 1 2 1 4 1 1 0 0 0 0 0 0 0 0 0 0 0 0 1

Austria 0 1 0 0 72 0 1 0 1 0 0 0 0 0 3 0 0 1 0 1 0 1 0 1 1 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Belgium 1 1 1 0 0 66 0 2 1 1 0 0 1 1 1 1 1 7 0 1 3 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Bulgaria 0 0 0 0 0 0 75 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Cyprus 0 0 0 0 0 0 0 71 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Czech R 0 1 0 0 1 0 1 1 72 0 0 0 0 0 1 0 0 0 0 0 0 1 0 0 4 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Denmark 0 0 0 0 0 0 0 0 0 70 0 0 1 0 0 0 1 0 0 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Spain 1 1 1 1 0 1 0 1 1 1 85 1 0 1 1 1 0 1 0 2 1 1 6 1 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 1

Estonia 0 0 0 0 0 0 0 0 0 0 0 70 0 0 0 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Finland 0 0 0 0 0 0 0 0 0 1 0 3 78 0 0 0 1 0 1 1 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Greece 0 0 0 0 0 0 1 3 0 0 0 0 0 72 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Hungary 0 0 0 0 1 0 0 0 1 0 0 0 0 0 59 0 0 0 0 0 0 0 0 1 2 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Ireland 1 0 0 0 0 1 0 0 0 0 0 0 1 0 0 54 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0

Lithuania 0 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 62 0 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Luxemb 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 38 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Latvia 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 1 0 78 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Malta 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 61 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

NL 1 2 1 1 1 7 0 2 1 3 1 1 1 1 2 2 1 3 1 1 67 1 1 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Poland 0 1 0 0 1 1 1 0 2 1 0 1 0 0 1 1 3 0 2 0 0 77 0 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Portugal 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 80 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Romania 0 0 0 0 0 0 1 1 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 77 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Slovakia 0 0 0 0 1 0 0 0 2 0 0 0 0 0 2 0 0 0 0 0 0 1 0 0 66 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Slovenia 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 69 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Sweden 0 0 0 0 0 0 0 0 0 3 0 2 2 0 0 0 1 1 1 0 0 0 0 0 0 0 73 0 0 0 0 0 0 0 0 0 0 0 0 0 1

Turkey 0 0 0 0 0 0 2 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 1 0 0 0 82 0 0 0 0 0 0 0 0 0 0 0 0 0

Russia 0 1 1 1 1 0 5 0 1 0 0 2 2 2 2 0 17 0 2 0 1 2 0 1 4 1 1 2 93 0 0 0 0 0 0 0 0 0 0 0 1

Brazil 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 1 0 0 0 1 0 0 92 0 0 0 0 0 0 0 0 0 0 0

India 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 85 0 0 0 0 0 0 0 0 0 0

Taiwan 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 68 1 0 0 0 0 0 0 0 0

China 1 2 1 1 1 1 1 2 3 2 1 2 2 1 4 2 1 3 0 4 3 2 1 1 2 1 2 1 1 1 3 5 88 2 1 4 3 2 4 2 5

Australia 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 89 1 1 1 0 0 0 0

Japan 0 0 0 0 0 1 0 0 1 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5 1 0 92 2 1 0 1 1 2

Korea 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 2 0 0 0 0 0 0 2 1 0 0 78 1 0 1 0 1

Indonesia 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 1 85 0 0 0 0

US 2 1 1 1 1 2 0 2 1 3 1 1 1 2 2 12 0 3 1 1 3 1 0 0 1 1 2 1 0 1 1 3 1 1 1 2 1 91 11 10 5

Mexico 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 76 0 0

Canada 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 81 0

RoW 4 3 3 4 4 4 4 3 2 4 3 5 3 7 3 6 4 2 4 6 7 2 4 3 5 5 4 6 1 3 7 11 4 4 4 7 6 3 2 2 73

RTA coverage of SCT, 2009

Mega Regionals

0%

5%

10%

15%

20%

25% RTA trade coverage (% of world trade)

Trade & development changed• Build versus join a supply chain.

Trade changed

US-EU25

1986

Intra-Asean

Japan-Asean

US-China

0%

10%

20%

30%

40%

50%

60%

1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

2012

Index of intra-industry trade

G7

1990

Asia

LatAm

0

1

1

2

2

3

3

4

4

519

6719

7019

7319

7619

7919

8219

8519

8819

9119

9419

9720

0020

0320

06

Vertical specialisation index

International trade politics changed• Developing nations seek pro-supply chain disciplines. • Unilateralism; BITs, FDI; deep RTAs.

BITs signed

per year

(right scale)

World FDI ($ billion)

1988

0

500

1000

1500

2000

2500

0

50

100

150

200

250

1959

1964

1969

1974

1979

1984

1989

1994

1999

2004

2009

South Asia

Sub-Saharan Africa

Middle East & North Africa

1993

East Asia & Pacific

0

5

10

15

20

25

30

35

40

45

50

19881990199219941996199820002002200420062008

Applied tariffs (%)

RTAs signed (bars, right scale)

Depth of

RTAs signed (line)

1990

0

5

10

15

20

25

30

35

0

50

100

150

200

250

1948

1958

1964

1970

1976

1982

1988

1994

2000

2006

Global manufacturing shares

1990, 65%

G7, 47%

4%

17%China

+ Korea

3%

5% five risers

RoW

0%

10%

20%

30%

40%

50%

60%

70%

80%

1970

1975

1980

1985

1990

1995

2000

2005

2010

Korea

India

TurkeyIndonesia

Poland

Thailand

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1970

1975

1980

1985

1990

1995

2000

2005

2010

Wor

ld m

anuf

actu

ring

shar

e

KoreaIndiaTurkeyIndonesiaPolandThailand

US

ChinaJapan

Germany

Korea

ItalyUK

France0

200

400

600

800

1000

1200

1400

1600

1800

2000

1970

1975

1980

1985

1990

1995

2000

2005

2010

$ bi

ll 20

05

Regional clustering of stages• Distance still matters (people still expensive to move)

– Supply chains are regional not global; why?– Hypothesis: “Face-2-face” and “Face-2-machine” constraints.