Is the WTO terminally ill?

Threats to the international

trading system

Abstract

The international trading system is under threat. Many observers have already expressed serious
concerns about the impact of Covid, the war in Ukraine, tensions over Taiwan and other natural
and man-made disasters and their effects on the international trading system. Some even doubt
its viability and chances of survival. The purpose of this paper is to assess the weight of those
arguments. It is argued that the turmoil in global markets is, of course, a factor endangering the
system, but the system is threatened even more by its own weaknesses. These are various
imperfections in the international trade agreements in the WTO which are dividing the
international community into separate groups. It is also shown that economic theory does not
help us much to show the directions for policy makers to reach optimal trade agreements. It is
argued that the splitting of countries into different negotiating and trading blocs is the optimal
step under present conditions.

Keywords

Gatt/WTO governance
Trade rules
Optimal trade
And investment agreements

1. Introduction

The establishment of the Bretton Woods institutions - the IMF, the World Bank and the GATT -
was a milestone in the development of global economic and financial governance. It was critical
to support governments’ efforts to rebuild their economies devastated by the Second world war
and to stimulate economic growth. For GATT, this meant, primarily, to provide a platform for
negotiations – to negotiate rules of international trade that would govern trade relations and
ensure that all countries/signatories would follow the same rules. For the GATT, this also meant
another important challenge – to achieve the second goal of those negotiations and this was to
liberalize international trade.

The negotiations lasted many years and took the form of various Rounds of negotiations and
finally ended with the establishment of the WTO in 1994. Trade liberalization took essentially
two forms. One was the establishment of mutually agreed rules that were non-discriminatory,
transparent, and predictable. The second was the push to reduce, if not fully eliminate, barriers to
trade, and this was primarily focused on cross-border measures such as tariffs and quotas. As a
result of those negotiations, international trade was continuously liberalized. The extent of
liberalization was remarkable. If the average tariff protection of many developed countries was
about 40 % immediately after the War, by the end of the 21st century, the US, the EU and Japan
had their average tariffs slashed down to 2–3 %. Quantitative restrictions have been mostly
eliminated. All major industrial/rich countries joined GATT, which meant that perhaps 80–90 %
of all world trade was affected and stimulated by those liberalizing measures. 1
Now, this is part of the history. The whole system of GATT/WTO, so painfully and successfully
established after the war and in 1994, is now under threat and with major question marks about
its future.2 This paper looks at the current threats to the international trading system (ITS) and
identifies the sources of the turmoil. These sources are divided in two groups. The first group
includes various external shocks to the global economy. The second group, which is emphasized
in this paper, includes various features and developments of the WTO regime's agreements,
rules, and the dispute settlement mechanism. It is argued that it is primarily the latter group of
factors that causes the potentially fatal fragility of the global system of trade governance.
Let me start by introducing three qualifications. The first qualification concerns the definition of
the international trading system (ITS), which I take to mean a system of international trade
agreements (ITAs). My second qualification narrows down the definition of ITA. By ITA I shall
be referring to the system multilateral agreements under the WTO regime. Even though much
will also be said about regional and bilateral trade agreements, this will be done in the context of
the discussion about the WTO system. Finally, my approach will be heavily tilted to economic
analysis even though the WTO agreements are legal documents signed by governments and
ratified by parliaments. I shall attempt to provide an analysis of the economic literature, and I
will only refer sporadically to the legal and political science literature and only when I believe
that the latter helps the economic arguments.
The questions I shall be asking in this paper are: What have been the forces which have affected
international trade in recent years? How ready was the ITS to deal with those forces and how did
policy makers respond to them? Parts of the discussion will inevitably be descriptive. However,
an attempt will also be made to provide an analytical basis for the assessment of the ITS and its
capability to deal with external shocks with the help of the theoretical literature.

My main point is that the international trading system is indeed in trouble and the main reason is
that the WTO, the guardian of trade rules, has over-reached its mandate in shaping the agenda
and the rules and their implementation. It cannot perform effectively because the agreements are
not consistent with the emergence of non-market objectives such as protection of state-owned
enterprises or industrial protection that are increasingly dominant in global markets. The WTO
cannot perform effectively also because of the introduction of new objectives to its agenda,
particularly the reduction of trade protection. Moreover, some WTO rules are also imperfect and
so is their implementation by various, mostly developing, countries. My second point is that this
“damage” to the WTO's operations is not irreparable. Objectives such as industrial protection or
trade restrictions for security reasons or for protection of the environment or of women or of
labor rights can and should be handled by other bodies and agreements. They can become a part
of trade arrangements only for like-minded countries in plurilateral arrangements. Those
arrangements are also likely to be most successful in addressing the remaining behind-the-border
measures.

The paper is structured as follows. I start in Section 2 by reviewing various exogenous events
that have recently impacted the global economy and trade relations. Exogenous events are only a
part of the story. Trade relations are strong as long as the institutional system in which they
operate can support those relations. Section 3 will, therefore, address the WTO system and its
weaknesses and imperfections at this time of crisis in trade relations. In Section 4 we shall turn to
economic theory and review and discuss how the international trading system has been treated in
the literature. We shall first ask and discuss why countries sign international trade agreements.
We shall then discuss in more detail the benefits of those agreements and finally, we shall ask
whether the agreements can or cannot be “optimal”, drawing on the theoretical literature. The
final section not only presents conclusions, but it also provides policy recommendations.
2. New threats to the ITS

The ITS has undoubtedly been affected by significant changes in global markets and by a
changing policy environment originating in important modifications of strategies of several key
trading nations. I shall briefly turn to each of these topics in this section.

2.1. Global markets and global value chains

In discussing threats to the ITS, critics typically first refer to the turmoil in global markets in the
last 3 or 4 years. Key events are, of course, the COVID pandemic, rising insecurity in Central
Africa and Taiwan and the war in the Ukraine. Frequently mentioned are also numerous and
more frequently occurring natural disasters such as typhoons or tornadoes linked to climate
warming. Most of those shocks have hit markets unexpectedly and have been typically seen as a
surprise by policy makers. We have witnessed other phenomena starting with the relative decline
in real incomes of the “middle-class” in the United States and criticism of the effects of
globalization on the access of people to medical care, or access of young people to elite schools,
or problems of minorities – all apparently contributing with different intensity to the threats to
the ITS (Rodrik, 2023).3
The major symptom of these shocks has been the effect on global value chains (GVCs). As it is
well known, GVCs played a crucial role in the impressive performance of international trade
during the period from the beginning of the 1990′s until the COVID epidemic and the Ukraine
crisis. The phenomenon of GVCs cannot be overemphasized. During this period, the rapid
growth of world economies has been increasingly dependent on the growth of global trade
which, in turn, has been increasingly stimulated by the formations of GVCs and their
performance.4 World trade grew especially rapidly when the Peoples Republic of China joined
the World Trade Organization and as more developing countries shifted to open strategies, with
global gross exports growing at an average 8.7 % per year and indirect exports at 9.7 % during
2000–2010. Global trade growth slowed down in the following decade, but it continued to
growth faster than global output.
It may be useful to quote Rodrik. “From 2000 to 2010, chains lengthened for virtually all traded
sectors. It was this breaking up of the production process that introduced new efficiencies and
productivity gains and made it possible for developing countries to enter manufacturing
production, in particular, by finding a niche in the production chain. No longer did developing
countries have to produce complete products; they could expand their comparative advantage by
taking on certain tasks in the production chain” (Rodrik, 2023). And some developing countries
have dramatically increased their share of GVC trade. The most spectacular increase took place
in Vietnam, which had 14.3 % annual growth in indirect exports during 2010–2019. Cambodia
and the Lao People's Democratic Republic, among other Asian economies, achieved similar
increases (WTO, 2021).
At the same time, it is evident that a production system that relies heavily on the just-in-time
delivery of parts sourced from only a few key locations is subject to considerable risks in times
of market uncertainty and malfunction. This is what happened late in 2010–2019 when transport
routes were disrupted by COVID restrictions and, subsequently, by natural disasters including
floods in Thailand and the deep freeze in Texas in 2021 and by the war in Ukraine. IMF
(2022) shows that, at the world level, shipping times jumped upwards as soon as the COVID
crisis hit, and, after a marked acceleration from end-2020, delays increased by 1.5 days on
average by December 2021 – or roughly a 25 % increase in global travel times. The estimated
additional days in transit for the average shipment in December 2021 could be compared to an
ad-valorem tariff of 0.9–3.1 %. In addition, many ports exhibited longer wait times despite
handling less cargo than pre-pandemic. GVCs have clearly become riskier and more costly.
None of this makes it clear how GVCs will develop in the future. Some observers believe that
the recent disruptions to GVCs do not represent their final days. Dadush (2022), for example,
sees the current developments as reflecting only a temporary retreat of GVCs from global
markets. He writes: “Indeed, barring a cataclysm, globalization is not dead. Powerful economic
forces are at work that require increased reliance on GVCs and improve their operability in the
future”. It is simply not evident whether the repeated shocks to GVCs are purely random and
disjointed events or whether they are the result of fundamental shifts in the global economy,
climate, and the geopolitical environment. However, what is evident is the responses of
governments. There has been a major rethink by policy makers around the world about the ITS
following the disruptions in GVC, rising political tensions between the US and PRC and the
climate and geographic events.

2.2. Changing strategic considerations

Among those areas, the most sensitive and important one is the new look by governments at the
“strategic concerns” of their countries. “Strategy” as a policy objective has obviously always
been an element in the objective function of governments, but the recent changes in global
markets have put a new and bigger emphasis on those concerns and have led to more radical
interventions. The extensive and expansive system of sanctions against Russia following the
latter's invasion of the Ukraine is an obvious case in point. New looks at “strategic”
considerations have also led to rising tensions in trade (e.g. chips, rare earths, steel, and financial
services) between China and the US (the “Trump war”), and between the EU and China (e.g.
medicines and rare earths) and ultimately leading to reconsideration of, and new approaches to,
industrial policy both in the US and in the EU.5
Some critics identify other major changes in global policy making apart from strategic
considerations. What has been emphasized, in particular, is the rising importance of social equity
(Rodrik, 2023) and the role it plays in policy. While it may seem to be an exaggeration to argue
that the rising concern of social equity has a direct effect on the ITS, the effect is indirect.
Consider, for example, the following. Bilateral investment agreements, which have been initially
embraced by the whole international community, have been recently under considerable attack
by critics who criticize the unfair distribution of risks between host countries and foreign
investors. Or consider the current WTO negotiating agenda, which has been increasingly tilted
toward issues of primary interest to developing countries. Other examples include the new trade
and investment agreements of the EU and the US with developing countries, which go far
beyond covering narrow trade issues to include cooperation in areas such as sustainable
development, migration, good governance, social cohesion, etc. Social equity is becoming a
matter of importance not only in deals with developing countries but also between rich countries.
For example, the Comprehensive Economic and Trade Agreement (CETA) between Canada and
the EU seeks not only to improve trade opportunities but also to do so by protecting consumers
and the environment and spreading the opportunities to all sizes of business, not only to
multinational companies.
The third area of policy making emphasized by the critics that is influencing the trade policy
agenda is “environmental protection”. Measures targeting green energy, energy savings and
withdrawing from Russia as their main energy supplier have led to the most extreme change in
trade relations of the EU. Concerns such as deforestation in different parts of the world, the
Amazon and the Brazilian government's policies, energy intensity of GVCs, plastics pollution
and plastics trade, or fossil fuel subsidies have come to influence both the new negotiating
agenda for trade agreements and even the actual policy interventions, with implications for trade.
Environmental concerns have been adopted in the WTO, allowing Members to take regulatory
measures, including trade restrictions, to achieve legitimate policy objectives (e.g., protection of
human, animal or plant life or health, and natural resources) and the rights of other members
under basic trade disciplines. Those concerns have been recently subject to efforts to intensify
the debate and stimulate the initiation of new multilateral negotiations on trade and the
environment, but progress is slow and only has marginal success (e.g., leading to negotiations on
fisheries subsidies and on the relationship between the WTO and multilateral environmental
agreements (MEAs) .6
The changes in global trade and in the strategic considerations of key trading nations have
obviously generated concerns about globalization and the ITS. COVID and changes in GVC can
be seen as temporary but strategic changes are more serious since they may touch upon the
fundamental principles of the WTO. Those concerns should have been addressed by the WTO,
the institution with the mandate to establish the mutually agreed trade rules and ”police” their
implementation. How well does the WTO meet those functions?

3. Dysfunctional WTO?

To answer the question about how well the WTO performs in meeting its mandate, it is
necessary to note that the WTO has had many critics over the years. The criticism has been
conducted along many levels such as doubtful gains from the WTO agreements, threats to food
security, extension of the agenda beyond trade issues, unrepresentative decision making or loss
of sovereignty. In this section, I shall attempt to deal with shortcomings of the WTO somewhat
differently by addressing the actual operational problems.

3.1. Symptoms of illness

Problems for the ITS started long before COVID, Ukraine and all the other recent shocks to
global economy (Bhagwati, 2013). Those problems are related to the fragility and imperfections
of the “policeman” of the ITS – the WTO (Elsig et al., 2017). Before discussing the specific
shortcomings of the WTO system, let me first identify symptoms of illness of the WTO, which
may have been known to some observers and governments but have been ignored in the face
enthusiasm for the institution following the successful conclusion of the Uruguay Round
negotiations.

3.1.1. The ongoing trade negotiations

The momentum of global trade negotiations was interrupted or lost. The energy that led to the
support for the Uruguay Round was dissipated, and this reflected the complexities associated
with the expansion of the Membership, first in the GATT system from the original 23 countries
to 128 countries at the time of the establishment of the WTO in 1994, and to the current 164
countries as Members and additional 25 countries in the status of observers. But the problems
were deeper as we discuss further below. The WTO already has a long history of failed attempts
to negotiate deeper trade and investment agreements. Ministerial conferences in Seattle, Doha,
Cancun, Bali and the intermittent meetings in Geneva adopted new decisions mainly about the
Doha development agenda and trade facilitation with the rest focused on decisions
operationalizing existing agreements and rules. Several attempts to multilateralize investment
rules have also failed.7

3.2.2. Poor negotiating agenda

The lost negotiating momentum was reflected in the highly problematic and poor negotiating
agenda. Agricultural negotiations were a particularly sensitive and to some extent controversial
issue. The thrust of concessions in the negotiations was placed on services and, in particular, on
industry. This has made the Marrakesh Agreement of less interest to developing countries with
their large rural populations. Moreover, the agricultural negotiations involved negotiations of
behind-the-border measures in rich countries such as subsidies, which further disincentivized the
poor countries which typically do not provide much fiscal support to the rural areas.

The weakness of the agenda is also due to the large size of the large range of the negotiated
issues, which acted as a detrimental incentive to address new and more important issues of the
existing agreements.8 Currently, the WTO agenda and formal discussions cover goods, services,
intellectual property, dispute settlement, regional trade agreements, the Doha Development
Agenda, COVID, and building trade capacity and trade monitoring. In addition, there are 22
other special topics to be addressed by the WTO negotiators, starting from discussions about
civil aircraft, digital technologies, competition policies, electronic commerce and ending with
topics such as trade for peace, women, and trade and gender. Included are also discussions on
important topics such investment, government procurement, the environment, small business,
and trade finance as well as other topics. Given this range of activities, it is not surprising that
new and current WTO issues under negotiation in which progress has been achieved are limited
to fishing and trade support for LDC – trade facilitation agreement. We shall return to this issue
below.

3.2.3. Explosion of regional trade agreements

Perhaps the most obvious symptom of “unease” about the developments in the WTO has been
the rise of regionalism and formal regional trade agreements (RTA). In strictu sensu, RTAs
operating alongside multilateral rules represent a formal exception to the principle of non-
discrimination and weaken the global system. They have been sought by WTO Members for a
variety of reasons - some with a pro-trade (trade-stimulating) agenda, other having more a
defensive program. The diversity of RTAs greatly differs, ranging from shallow to deep
integration. They seek to intensify linkages of developing countries among themselves as well as
creating a closer link between developed and developing countries. Some aim to address specific
issues of “sensitive” sectors. RTAs have also been actively used by countries to address the
particularly difficult problems posed by agriculture in the WTO. 9 The total number of RTAs in
force increased from 3 to 37 in 1994, and the number exploded to 305 by 2000. There are
currently 360 RTAs in force and cumulative notifications are 593.
Source: WTO: Regional Trade Agreements Database, 2024, Geneva: World Trade Organization

3.2.4. The WTO dispute settlement

The WTO dispute settlement mechanism is arguably the most important element in the structure
of the WTO system since it is the key to the enforcement of WTO rules and procedures (Bown,
2004). As already noted above, the Dispute Settlement Mechanism (DSM) of the WTO is the
only enforcement mechanism of global rules or standards in existence. In reality, however, it is
only as effective as Members allow it to be, and it runs into serious problems as discussed further
below. There are strict and precise rules for its functioning, which are split into two steps. The
first layer of the DSM is taken by the panel established by the Dispute Settlement Body and the
second layer consists of the Appellate Body (AB) which hears the appeals against the decisions
of the panel. But the functioning of the Appellate Body (AB) was put in jeopardy on 10th
December 2019, as two out of its three remaining members’ four-year terms came to an end, and
the United States decided not to approve appointment of new members to the AB. Without going
into details, the US essentially objected against delays in decision-taking, judicial over-reach,
and objections concerning precedence and transition rules. 10 This was not the first time that US
objected against the work of the AB, which testifies to serious concerns of the US about the
DSM and hence the ITS as we know it.
In sum, what we see, like many other observers, is that there has been a partial erosion of the
rules-based global trading system, which has become increasingly subject to the proliferation of
protectionist measures. “WTO negotiations remain stalled, and its dispute settlement system was
disabled, major regional and bilateral agreements have been concluded across the world, most
notably in Asia and Africa. Fragmentation of the trading system into regional blocks (Americas,
Asia and Europe), each only partly cohesive and with unstable links between them, is a real
possibility” (Dadush, 2022).

3.3. Other imperfections of the Uruguay round agreements - unresolved issues

Having described the symptoms of the WTO's fragility and illness, we now turn to the origins of
those problems. To do so, we must have an idea or concept of what constitutes a “good”
agreement. Trade economists think of such agreements in terms of efficiency or some other
concept of optimality. We shall return to those arguments further below. In this section the
agreements will be assessed within the context of the existing system and its two objectives, non-
discrimination and trade liberalization, by identifying the missing elements of the agreements. It
is, therefore, tempting to treat the WTO Agreements as incomplete contracts. The
incompleteness of the agreements has three main features: (i) missing rules, (ii) incomplete rules,
(iii) incomplete compliance (developing countries).

3.3.1. Missing rules

The range and the number of topics covered by agreements in the WTO is quite impressive. On
some counts, there are 33 existing agreements covering goods, services, intellectual property,
dispute settlement, RTAs, the Doha Development Agenda, trade and COVID, building trade
capacity, and trade monitoring. In addition, there are many other activities under the umbrella of
the WTO in the form of 24 working parties ranging from Working Parties on accessions, trade
and competition policy, civil aircraft, and digital technologies to Working Parties on trade for
peace, trade and women and trade and gender. The number of Working Parties rises with time as
global developments bring new issues to the forefront. However, all these activities and
agreements notwithstanding, there are several issues of great importance that are currently
missing.
State-owned enterprises (SOEs). The first one to note is the absence of treatment of state-owned
enterprises and rules disciplining their activities. When establishing GATT and subsequently the
WTO, the founding fathers of the institution centered the formulation of the agreements on firms
operating in market economies, which are subject to commercial objectives and disciplines.
Treatment of non-private enterprises has been limited in the agreement to regulating state
trading. State trading enterprises are defined as governmental and non-governmental enterprises,
including marketing boards, which deal with goods for export and/or import. (Art. XVII of the
GATT 1994). The issue of state-owned enterprises (SOE), however, did not arise during the
GATT period because the only member of note was Czechoslovakia (one of the founding
members of GATT) whose membership was mute throughout the whole period for political
reasons.11
Everything changed in the 1990s with the application of China as well as other formerly
communist countries for Accession to the WTO. Launching market reforms in December 1978
under Deng Xiaoping, China introduced market reforms that introduced markets into the
economy but left large segments of the economy in state hands. Electricity generation and
distribution, construction, railway engineering, oil drilling, and, in particular, banks remained
SOEs. China's 12 biggest companies are all government owned. China's Global 500 companies
are bigger than ever and mostly state owned. There are 98 Chinese companies on the list of 500
Top Global companies with only the US having more representation. In other words, economic
growth and the transformation of the economy and its competitiveness have been generated to a
very large extent by the internationalization of Chinese SOEs and their success and market
power.

Within the realms of the WTO, China is being treated as a prima facie market economy even
though SOEs are a powerful engine of economic growth in China. This raises serious questions
about the rationale and effectiveness of WTO rules and agreements. 12 In addition, SOEs
frequently benefit from explicit or implicit government support, which often subsidizes their
inefficiencies.13 Does this support give SOEs competitive advantages over private firms? For
example, does the subsidy agreement provide effective disciplines on subsidies provided by
Chinese authorities to Chinese firms? More fundamentally, do Chinese SOEs genuinely operate
under the “hard budget constraint” known from open market economies which are subject to true
market competition and discipline, rule of law and protection of investors and consumers? Can
SOEs contribute to other global goals (for example, curbing domestic pollution and mitigating
climate change)?14
The experience from countries with large involvement of SOE as well as a considerable
theoretical and empirical literature points to serious deviations of SOEs from standard market
principles. There is a large literature on corporate management in SOE which are not subject to
the dominant goal of profit maximization, and which are not subject to effective controls by
shareholders. As noted by IMF, (2020), many SOEs around the world are struggling. SOEs
generally have low productivity and often fail to provide services such as access to safe water,
sanitation, and reliable electricity to the entire population. Some may end up as a significant
drain on the government budget and might have even contributed to economic and fiscal crises
(IMF, 2023). The Chinese SOEs might have been performing better in providing basic services
but, like all the big multinational SOEs, they raise the same concern about their activities, that
they distort competition.15,16 Poor profitability, low or negative returns on equity, easy access to
credit have all been widespread among Chinese SOEs, and the situation has been getting worse.
Referring to the Kornai's studies of SOEs, a recent IMF study characterizes the SOE budgetary
constraints as “soft” and calls for ending the implicit guarantees and preferential access to credit
and for carefully allocating losses to owners and creditors. All these concerns have already led to
attempts to regulate activities of SOEs in order to ensure and/or generate competitive neutrality.
So far, such attempts have been limited to a few OECD countries, but the main outstanding issue
for the WTO is China and its SOEs.
Deep integration. Trade negotiators have recently been under increasing pressure to deepen trade
and economic integration and negotiate new rules and disciplines involving “deep integration”.
The Trump “trade war” is by now infamous. But the US and other governments respond,
sometimes unilaterally, other times bilaterally as part of RTAs, to new challenges such as to tax
avoidance by MNCs (e.g. Beer et al., 2019) and the jurisdiction over the taxation of MNCs such
as Google, Amazon, Facebook, or Instagram in the EU and elsewhere, to the protection of
foreign investors, which is perceived by critics as “excessive”, to the rising concerns about the
global commons, to complicated sourcing problems or to the treatment of behind-the-border
protective measures.
Deep integration, as defined by Claar and Nölke (2010), means trade agreements which not only
contain rules on tariffs and conventional non-tariff trade restrictions, but which also regulate the
business environment in a more general sense. Issues of deep integration could include
competition policy, investor rights, international flows of investment and labor, and the
environment and intellectual property rights, for example. Needless to say, that deep integration
also includes refinement and improvement of existing rules such as rules concerning strategic
interests noted above but also other rules such as public procurement. The NTBs that receive the
most attention are those that arise from differences in domestic regulations or what Sykes
(1999a, 1999b) termed “regulatory heterogeneity.”
Most of those deep integration measures have not been taken up by the WTO but by various
RTAs. Latin American countries neighboring the Amazon are getting together to seek a
sustainable solution to the deforestation of the region. The EU has signed several trade
agreements which include various provisions of deep integration. Even African nations, which
have been left behind the rapid growth of world trade driven by supply chains, integrate
themselves regionally and across the whole continent to promote and strengthen trade
facilitation.17 Other issues are taken up unilaterally, such as abandoning bilateral investment
treaties (BITs) by countries such as Ecuador, Bolivia, South Africa, Indonesia and India.
According to the pre-Covid reports, 38 countries already terminated their BITs. 18 In contrast, the
WTO remains immune to the push for deeper integration with some exceptions such the recently
negotiated agreement on fishery subsidies.
The objectives of those RTAs, which contain deep integration provisions, seek to strengthen the
contestability of markets for firms in partner economies through three main functions: protection
of foreign firms and their interests; liberalization of “behind-the-border” trade barriers; and
harmonization of domestic trade rules to enhance the efficiency of international production.
(Kim, 2015).
More critically, the WTO has been facing the more fundamental question whether it should be
involved at all in rulemaking in areas other than tariffs and quotas in strictum sensu. The doyen
of international economics Prof. Jagdish Bhagwati has been arguing for years that WTO should
not expand its agenda beyond strict trade issues. The WTO Membership has gone the other way,
and, so far, it is finding it well-nigh impossible to make any significant progress in negotiating a
deep integration agenda.18(UR)

3.3.2. Other missing rules

The main target of measures negotiated in GATT and the WTO was historically industry and the
high tariffs that protected industries after World War II. The Uruguay Round negotiations
brought in services leading to the General Agreement on Trade in Services – GATS and the
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). Agriculture has
been a part of the Uruguay Round agreements but has been liberalized far more slowly than
industry. Agricultural protection remains high in rich countries. Theoretically, this puts them in
conflict with poor countries which have large populations dependent on agriculture. However,
there are very few developing countries capable of entering global agricultural markets due to the
extremely low level of agricultural efficiency. This together with the dominant effect of major
agricultural producers and exporters such as Brazil, Ukraine and Russia as well as of some
subsidies and other supports of their agriculture imposed by rich countries such as the EU and
the US on global agricultural markets has led to calls for measures to ensure food security in
poor countries.19 The food security issue has been brought to the WTO, but it is doubtful whether
the WTO is the appropriate and effective forum to discuss those issues and to seek solutions to
problems of rural poverty in poor countries where constrains such as access to land, poor
educational attainment levels, poor access to credit, and inadequate distribution and markets are
far more serious origins of rural poverty than is international trade. Some progress in agricultural
negotiations has been made (fisheries and elimination of export subsidies) but effects of those
agreements are relatively limited.
Another area needing reforms is government procurement. It is covered in the WTO by the
Government Procurement Agreement. Government procurement is an important area for
businesses and of market activities in many countries. The World Bank estimates that public
procurement represents on average 13 % to 20 % of GDP. Global expenditure in procurement is
estimated at nearly 9.5 trillion US dollars and, according to the United Nations Office on Drugs
and Crime, 10–25 % of a public contract's overall value may be lost due to corruption.20
It would certainly be in the interest of WTO members to agree on rules of procurement which are
transparent, fair, trade promoting and ensuring the greatest efficiency of public resources. The
debate in the WTO is instead focused on “the best practices to attract SMEs”, “sustainable
practices”, “safety standards” and “procedures for data collection”. It is evident that members are
unable to deepen the debate to include corruption or evaluation of public projects and social
discounting. Once again, the WTO does not seem to be the right venue to discuss public
procurement even though it must remain a part of the agreements.

Finally, the last area in need of further reforms is the link between trade and debt, which has
been a matter of concern to members in cases of countries finding themselves in balance of
payments (BOP) difficulties, which may require the use of trade restrictive measures. This is, of
course, strictly not a matter for the WTO but for the IMF, but the WTO is clearly an important
channel of communication to the IMF as one of the three Bretton Woods institutions. The IMF
has made considerable progress in responding to criticism of its programs and tried to adapt them
accordingly. The WTO should encourage the IMF to continue taking steps towards a more
effective marriage of macro-stabilization measures (or, using the WTO's language, “ensuring a
level of reserves adequate for the implementation of programs of economic development”). This
should include creative thinking in the IMF about (i) cross-border capital controls, (ii) swap
arrangements between central banks under RTAs, (iii) extending the time period needed to
restore the equilibrium level of foreign reserves.

The WTO has been under considerable pressure to provide more flexibility to Members to use
trade restrictive measures in order to protect economic growth and employment when countries
run into BOP difficulties. It has not been able to do so unless such measures were compatible
with the Fund's program to control the country's liquidity and, in particular, its level of
international reserves. Together with the World Bank, the WTO should, therefore, help countries
in BOP difficulties to generate stronger foreign currency earnings and seek elimination of
barriers preventing such increases. The WTO needs to bring greater clarity to the concept of
“development” in the GATT Articles XII and XVIII(b) and thus help to introduce an
operationally more effective notion of the equilibrium level of GDP and employment. 21
The world is moving very fast and is creating new challenges to which WTO is slow to adapt.
One of them is “is global tax-and-subsidy competition” with countries competing to attract FDI
and provide various incentives for MNCs to settle in their countries. Another major FDI related
issue is tax avoidance by MNCs benefiting from advantageous corporate taxation in some
countries and thus avoiding payment of taxes in countries in which they operate. Foreign
investment is essentially off the radar in the WTO with the exception of rules under GATS and
the by now extinct Trade Related Investment Measures Agreement (TRIMs) . The emerging
technological cold war between the United States and China threatens to fragment the world
economy even further.22

3.3.3. Incomplete/ Imperfect rules

Apart from missing rules, parts of the WTO agreements also suffer from what could be called
incomplete or imperfect rules. The legal literature is large on this topic. 23 But even non-lawyers
can spot the legal imperfections of WTO rules. Consider, for example, the famous dispute on
aircraft subsidies, which pitied the US against the EU for their respective support of Boeing and
Airbus. The case was launched in 2004, and, after several additional complains,
counterarguments, and appeals, the WTO arbitrators awarded the U.S. the right to impose tariffs
on $7.5 billion of annual EU imports. It took two more years before a decision was taken to
declare a truce between the EU and the US. After 17 years of arguing, the parties finally declared
the truce when the US suspended one-set of Trump-era tariffs for 5 years. The case is still
unresolved, it is expensive as it undoubtedly employs hundreds of highly qualified lawyers and,
and it remains unresolved.
Consider also another case – that of the US refusal to approve new appointments to the Appellate
Body (AB). The criticism included the argument that the arbitrators exceeded their mandate. The
US stated – “Appellate Body (…..) has overstepped its jurisdiction time and again, creating law
and indulging in “Judicial Activism”. According to the US, the AB is creating new rules, which
cannot be done, as the recommendations and rulings “cannot add to or diminish the rights and
obligations provided in the covered agreements, as per Article 3.2 of the Dispute Settlement
Understanding.”
It appears that the Appellate Body was criticized for trying to find a solution to the dispute by
acting in one of the two following ways: (1) It was seeking to provide new evidence and
arguments in the absence of perfectly non-ambiguous rules guiding the arbiters’ deliberations on
empirical evidence or treatment of facts, assessments of economic costs and benefits, procedural
limitations, or (2) It believed that it was acting consistently with the key WTO principle of non-
discrimination and hence that it was in the spirit and in the lines of its responsibility and
mandate. Be it as it may, the legal expertise of the Appellate Body got into conflict with the legal
expertise of the United States Trade Representative.
As noted above, environmental protection, industrial protection and national security have
recently been of considerable interest to governments around the world who pursued them in
unilateral and regional initiatives.24 All three cases represent directly or indirectly general
exceptions from the general rules of the existing WTO Agreements. Both environmental
protection and national security are specifically mentioned in the Preambles of the agreements.
The national security concern was included into the original 1947 GATT and subsequently
introduced into the founding agreements of the WTO in 1994/5. The clause constitutes an
exception to the agreements allowing a contracting party to take “any action which it considers
necessary for the protection of its essential security interests”. The rule is written in a manner
that provides an extremely broad interpretation of security interests and is written without
specificity and detailed provisions. Moreover, until about 7 years ago, it was rarely invoked and
even more rarely adjudicated. The rise of measures taken under the provisions of the national
security clause has increased and we now have two landmark decisions from the DSB on
national security.25 The first legal analyses of the decisions point to serious ambiguities facing
the WTO Members in interpreting the clause in future (Gladysz, 2021).
The incomplete feature of the WTO rules becomes even more evident by considering the issue
of trade and environment. First, there is no specific agreement in the WTO dealing with the
environment but, under WTO rules, members can adopt trade-related measures aimed at
protecting the environment. Those rights are covered by the general provision to seek
“sustainable development” which is included in the Preamble of the Marrakesh Agreement as
already noted. Two WTO agreements – Agreement on Technical Barriers to Trade and
Agreement on Sanitary and Phytosanitary Measures – offer legal instruments to achieve
environmental objectives without jeopardizing the fundamental trade rules.
Second, the ease of interpretation of environmental protective measures and their compliance
with the WTO provisions can be assessed by the procedural difficulties to adjudicate disputes.
The WTO Dispute Settlement Body (DSB) is fully available to disputes involving cases of
environment-related measures with the task of adjudicating their impact on trade. The cases of
disputes have been several and they were far too long, costly and clearly suffered from the lack
of precedence and an appropriate jurisprudence. The famous shrimp – turtle case dragged from
1994 until 2001.26 In the other well-known case - Dolphin- Tuna - Mexico brought the case to the
WTO in 1991. The United States lost the Tuna-Dolphin Case twice. More appeals and more
adjudication later finally led to the agreement in 2018. To do so, the case was resolved with the
help of the results from shrimp-turtle case, i.e.,a precedent was needed to finalize the case.
Third, the complicated adjudication process as well as the difficulties in advancing the debate
and negotiations in the WTO of the environmental issues reflect a problem coherence between
the WTO and the various multilateral environmental agreements (MEAs) negotiated under other
forums such as agreements covering the transport and disposal of hazardous wastes or tropical
timber trade. According to the WTO, there are nearly two dozen MEAs, which call for specific
trade measures for fulfilling the MEA's objectives, and a full coherence is, therefore critical to
ensure success both to trade and environmental interests. Those interests are often in conflict
with each other, which makes efforts to reach agreements on rules extremely complicated and
tedious. The WTO Members have been conducting meetings over many years to ensure
coherence without much success.27
Fourth, as a further complication of negotiations on trade and environment, Members have
brought into debates the question of the social impact of trade and environmental measures.
Thus, Members introduced debates on the distributional impacts of carbon pricing policies under
the Paris Agreement, on the impact of climate change on food security and on the impact of
environmental measures on trade. Given the enthusiasm for development-related issues and the
impact of global rules on developing countries, Members were also urged to study the impact of
those measures not only to mitigate climate change but also their effects on exports of low
income countries.28
Now, the case of industrial policies is different and debates about those policies in the WTO
could potentially completely undermine the whole WTO system. Even though industrial policies
have a long history, even in the GATT system, 29 the matter of new industrial policies must be
taken very seriously because of their rising importance in national policies. Juhasz et al.
(2023) even argue and show that different forms of subsidies and export-related measures,
together, already account for most industrial policy interventions across the gamut of high- and
low-income countries. They estimate that these measures constitute almost 90% of all
interventions. Higher income, e.g., G20, countries are frequent users of industrial policy.
The stakes would be high for the WTO if it were to integrate industrial policy into its system.
First, in contrast to a system based on freer markets as engrained in the philosophy and
jurisprudence of the WTO system, industrial policies typically start from government decisions
unilaterally deciding on the protection of a particular industry. In other words, governments
choose “winners”. Second, industrial policies heavily rely on non-tariff measures to generate the
desired incentives. For some commentators, we are moving away from “tariff wars” to “wars of
subsidies”.30 Coordination of regulations of NTB is far more complicated than that of tariffs.
Third, and most importantly, industrial policies are, by definition, protectionist and would
require an approval of those policies as another exception in the GATT-based system. The matter
is further complicated by the fact that industrial policies are often intertwined with strategic
considerations.31 Such an approval could today hardly be expected under any reasonable scenario
since it would dramatically weaken the ”open market” principle of the GATT and the WTO
fathers and involve a renegotiation of the Marrakesh Agreement.
In sum, the complexity of rules and new initiatives in the WTO are stimulated by general
provisions in the Preambles of the Marrakesh Agreement on security and
environment/sustainable development. More pressures for additional general exceptions are
generated by ongoing discussions about their social impact and industrial policies. Additional
pressures for departures from the non-discrimination principle come from poor countries and,
given the current initiatives, they might even come from supporters seeking gender equality or
anti-colonialism.

3.3.4. Incomplete compliance, implementation complications and the WTO governance

We have so far discussed the questions of missing and incomplete rules in the WTO agreements.
My next main concern is about problems of implementation of WTO mandates and rules. To
begin, it may be useful to quote this statement of the WTO: “While progress was achieved
across a broad range of issues, WTO members missed several official and unofficial deadlines
for concluding the Doha Round. Members later agreed to pursue negotiations on trade
facilitation separately, and at their Ninth Ministerial Conference in Bali, Indonesia in 2013
WTO members concluded the Trade Facilitation Agreement.
At their Tenth Ministerial Conference in Nairobi, Kenya in 2015, WTO members acknowledged
that while many members wanted to continue the Doha negotiations based on the existing
mandates, other members were not ready to reaffirm the mandates and believed new approaches
were necessary to achieve meaningful outcomes.”32
Implementation problem 1: Are LDC institutions strong enough and capable of adopting the
WTO rules? Rodrik and other critics of the ITS emphasize institutional weaknesses of poor
countries as one of the key factors preventing poor countries from benefiting from the expansion
of global trade. Legislative capacities, rule of law, fiscal responsibility, political instability and
other institutional weaknesses are often a major problem in many poor countries. Many
developing countries were not able to notify the WTO of their compliance with measures (rules
and disciplines) agreed under the Uruguay Round negotiations even 10 years after signing the
Marrakesh Agreement.33
Most of those problems were those of the poorest of the poor countries. Mid-income level
developing countries, like the BRICS or emerging market countries, have much greater
institutional capacity to process international agreements, and their level of compliance was
much higher than that of the poorest34 . The current WTO system recognizes the special
challenges faced by developing countries in competing in global markets, and Members agreed
to give poor countries special concessions to deal with barriers to trade and development.
Included as part of the new negotiations on Trade and Environment in 2001, WTO member
governments agreed to help Members with the implementation of the present agreements.
All this strongly suggests that those countries’ institutional capabilities adopt WTO rules and
disciplines is weak. For many developing countries the WTO did not necessarily serve as an
anchor for policy (Drabek and Bacchetta, 2010; Ferrantino, 2010). Costs of implementing the
WTO rules could be high (Laird, 2010). This raises a more serious question – are all WTO
Members ready to implement and comply with the WTO rules and disciplines and join a system
designed and shaped primarily by the rich and mid-income developing countries?
Implementation Problem 2: Different rules for different countries?
WTO is running increasingly into difficulties of implementing its “sacred” principle of non-
discrimination. The principle was first put to test when GATT Members decided to invite other
countries to join the Uruguay Round negotiations. It was only later – in 2001 – that Members
recognized different capabilities of countries to compete in the global economy and agreed on
the Doha development agenda (WTO, 2022). Since then, the principle of non-discrimination has
been tested by other initiatives. In addition to bringing in the question of environment, Members
have agreed to debate intellectual property, public health, biological diversity, social impact of
trade policies, women and trade, trade and gender, trade for peace. A large number of topics
under negotiation are already designed and chosen to address special needs of developing
countries such as trade facilitation, aid for trade, least-developed countries, technical
cooperation, a substantial agenda of topics on building capacity to trade, trade, debt and finance
and, in particular, special and differentiated treatment (SDT).35
Different rules for the same activity such as SDT for LDC are also extremely difficult to
negotiate.36 Members have been unable to agree because they find the SDT weak, imprecise,
ineffective and lacking operational quality. What constitutes reasonable concessions and a
reasonable level of extra protection required by developing countries as a group? Economists are
not of much help in providing guidance to negotiators. The economic theory of protection –
import substitution policies vs open market policies – is probably the most divisive theory in
international economics.
The negotiating arena of the large number of Members with great differences in income and of
institutional and strategic diversity hampers finding a solution to the prisoner dilemma through
negotiations. When a group of African countries, say, ECOWAS, wants to negotiate its level of
protection in the WTO, it will typically seek concessions from the rich countries. It will seek not
only a better access for its exports, which already face no or very limited restrictions, but they
will seek other concessions such as maintaining their own high tariffs, long periods of
adjustment and the like, i.e., a special and differentiated treatment. There are very few
exportables that compete with the rich countries’ exports; hence they seek benefits of a different
kind. When they negotiate with other African countries, however, they negotiate about real
market access for their exports. They become a real competitor and a threat. Moreover, there are
differences even among poor countries, and this would require, in the spirit of SDT, fine-tuning
the level of protection down to individual countries.

Implementation problem 3: The WTO as the arbiter and policeman of the world? Apart from the
dramatic reduction of tariff over the past 70 years, the most remarkable feature of the
GATT/WTO system is the DSM which helps to resolve disputes among Members, first through
consultations and, if no agreement is reached, then through a decision of the Dispute Settlement
Body (DSB). The final decision of the DSB can be appealed to the Appellate Body. If the losing
country continues to break the relevant agreement, it should offer compensation or face a
suitable response - a punishment representing a “remedy” to the winning party.
The Dispute Settlement Mechanism has been very active over the years and by and large quite
effective. By January 2008, only about 136 of the nearly 369 cases had reached the full panel
process. Most of the rest have either been notified as settled “out of court” or remain in a
prolonged consultation phase — some since 1995. Since 1995, 618 disputes have been brought
to the WTO and over 350 rulings have been issued. The WTO certainly has one of the most
active international dispute settlement mechanisms in the world.

However, the legal examinations and appeals are becoming increasingly complicated especially
as a result of the increasing number of actively used provisions of various WTO exceptions or
due to increasing complementarity with other multilateral agreements like MEA, the relevant
IMF balance of payments provisions, ILO codes and other. The Dispute Settlement Mechanism
no longer serves only to resolve disputes about the legality of tariffs or other straightforward
technical issues but also about other serious considerations such as strategic interests, public
health, public morals, biodiversity and environment. By way of an example, two environment -
related disputes raised the question whether animal welfare qualified as a “public morals”
exception that could be applied under WTO rules. The least developed countries in particular
have been adversely affected by various complications to effectively access the Dispute
Settlement Mechanism (Davey, 2010).
In the past, the integration of topics into the international trade agreements such as intellectual
property, health, technical and safety rules, labor standards, investment measures, dispute
settlement procedures, and others have been a major challenge for both negotiators and for
economists. It is evident that the introduction of topics such as the environment, special and
differentiated treatment, or referrals to general exceptions such as strategic interests have
dramatically expanded the range of debates in and mandates of the WTO, diluted attention and
priorities and expanded the WTO agenda and complicated the resolution of disputes. This raises
serious questions about the ability of the WTO to deliver on its original mandates.37
The new criticism of the WTO – Policy space and protection as the substantive undertaking?
Apart from the issues raised above, the WTO has been under increasing criticism from new
sources/origins, criticism that is attacking the underlying idea of the WTO – freer trade and open
markets orientation. The focus of the criticism is on two aspects of the agreements – regulatory
disciplines and, derived from them, industrial policies.
Policy space. The critics complain that WTO does not provide enough freedom to countries to
regulate. The WTO negotiations have brought about two major results over time. The first major
result was the dramatic reduction in trade protection, especially protection of industry. The
second major result was the manner it was achieved – by the reduction of tariffs and the
elimination of quantitative restrictions, and this exposed the trade restrictiveness of measures
behind – the- border – i.e., the non-tariff measures (NTB). Those NTBs include various
regulatory measures, some of which are already covered by the existing agreements (technical
barriers to trade -TBT and sanitary and phytosanitary measures - SPS), others are not. This raises
the question whether regulations, too, should be covered by the agreements and if so, how?
The reduction of protection has led to a backlash against the WTO and to criticism of what the
critics define as the “free trade” philosophy, politics and economic policy. 38 The reduction of
industrial protection is seen by them as damaging the interests of countries as well as bringing
about serious distributional problems even within countries benefiting from the reduced
protection. I shall return to their criticism in more detail further below. But the calls for more
protection are not limited to industry. The critics also point out that the inability of some
countries to implement the WTO agreements or, more generally, to benefit from freer trade are
due to a shortage of qualified experts, poor legislation and/or government administration and
various other administrative weaknesses. They call for extra protection of those institutionally
weak countries.39 Similar calls have been made by those who call for specially protective
regulations concerning health, environment or labor.
Regulatory heterogeneity. The other regulatory issue demanded by the critics is the issue of
regulatory coordination. The issue is fairly straightforward but highly complex analytically and
operationally. Should countries cooperate and coordinate their regulatory policies or not? The
debate has moved a great deal from the original emphasis on deregulation. 40 According to the
former Director General of the WTO, P. Lamy, who was one of the first to call for such a
cooperation, “the new landscape for trade negotiations requires harmonization, or at least
convergence, in regulatory measures”. However, the critics now increasingly argue that
international differences in incomes, cultures, risk preferences and tastes generally justify
regulatory heterogeneity (Sykes, 1999a, 1999b, 2000). As noted by Grossman (2021), the
writings of Lamy on the one hand and Sykes on the other raise the immediate question of the
appropriate trade-off in international trade agreements between heterogeneous tastes across
international borders and the cost burdens imposed by disparate regulations.
New industrial policy. Perhaps the most serious criticism of ITS is given by Rodrik and his New
Industrial Policy.41 Not happy about the benefits of WTO for poor countries, he calls for more
“policy space” to be given to countries by encouraging industrial policies and thus providing
space for countries protect their industries. In theory, many of those policies can be justified by
the “theory of the second best.” Despite a long history of theoretical debates about the costs of
protection and the merits of free trade, the costly experiences with those policies in Latin
America, Asia or the former communist countries, the critics call for new types of industrial
policy. They also provide new evidence in support of their arguments, as already noted above
(Juhasz et al., 2023).
What makes the current situation unusual and different from similar attempts in the past is the
entry into the domain of industrial policy by the US – the major promoter of free markets. The
US was the critical country in the establishment of the WTO, the founder of the Bretton-Woods
institutions and the main country pushing for the liberalization of global markets through
negotiations in GATT and the WTO. With Covid and China and now the Ukraine issues, the new
industrial policy measures of the US constitute elements of both protection of its own industries,
with the help of subsidies, and it is most likely discriminatory. 42 More broadly, the new industrial
policies have new features – they involve a broad and evolving set of industries, by targeting
GVC they affect both trade and production and stimulate cooperation of “like-minded” countries.
It is needless to add that not only is the US protecting its own interests, but it is also acting
against similar policies elsewhere. China launched its own program to become a technological
superpower in the mid-2010s with its Made in China 2025 program. This program evidently only
deals with new technologies while old technologies continue to be supported by existing policies
including those supporting SOEs. There were two other industrial policies introduced by the
Chinese government; the well-known Bell and Road Initiative and the less well known Dual
Circulation Model for the promotion of electric vehicles, clean technology, and digital
technologies.

New industrial policies affect not only trade but also foreign investment agreements. A common
feature of these new trade and investment agreements is a reduction in the ambit of central
provisions (to grant host countries more freedom to regulate without having to compensate
investors. For instance, Comprehensive Trade and Economic Agreement (CETA) stipulates in
Art. 8.9 that: “…the Parties reaffirm their right to regulate…to achieve legitimate policy
objectives, such as the protection of public health, safety, the environment or public morals,
social or consumer protection…”

To conclude this overview of the WTO rulemaking, the rule implementation and the work of the
WTO bodies, it is evident that the WTO agreements have been far from perfect and far from
perfect have also been the WTO institutions. As comprehensive were the Uruguay Round
agreements they remained incomplete (with missing rules) in their coverage and in various cases
they were seen as vague or unfair (viz. e.g. debate about policy space). The main WTO bodies-
the negotiating committees, general council and the Appellate Body of the WTO Dispute
Settlement Mechanism have lately not performed well. The trade negotiations are well-nigh
stopped, and the Appellate Body has ceased to function. There is evidently no appetite for deeper
integration of the WTO Member states.

The WTO oversaw an impressive expansion of international trade over the past 50 years or so
until Covid and remains an attractive institution for the whole global community to improve its
welfare. This is why various countries as well as many observers continue to seek ways of
improving the functioning of the WTO. The conflict between the criticism of the WTO and the
continued interest in the WTO by member states requires a further analysis with the help of
economic theory to which we now turn.

4. International trade agreements and economic theory

In this section, we shall look at the theoretical literature to see how economic theory can help us
better understand both the drive to establish GATT/WTO as well as the forces that have led to
destabilize the institution. What does economic theory have to say about the loss of interest in
multilateral rules and free trade? Why is it happening, and what does it mean for the future of
international agreements such as the GATT/WTO? To answer these questions, we need to first
understand what theory says about the reasons why countries conclude international trade
agreements (ITAs).
Unfortunately, theory does not provide enough guidance to understanding the actual commercial
policies agreed in the WTO with other partners. While the theoretical literature covered the
design of trade agreements, it was concentrated on the study of various flexibility mechanisms
embodied in trade agreements. Those mechanisms include contingent protection measures such
as safeguards and antidumping, and unilateral flexibility through tariff overhang. The second
important feature of the literature is the attention devoted to the dispute settlement mechanism of
the WTO, which is portrayed as a cooperative process subject to the constrains of incomplete
information (e.g. Jansen et al., 2017). The third feature of the literature has been the effort to
examine the regionalization processes and whether regionalism represent a stumbling or building
block to global integration. The key issues – why countries sign trade agreements and what
constitutes the optimal trade agreements have remained outside the interests of economists, as I
will argue below.
When countries sign international trade agreements they do so because they expect to benefit
from them. It may be, therefore, useful to briefly review the reasons why countries sign
international trade treaties. Only then can the treaties be assessed in terms of their stated
objectives. In addition, the focus of this paper is on the economic literature, which necessarily
limits the discussion. Various political factors also play a role both in motivating countries to
negotiate ITAs and in their implementation. My choice is driven by my belief that it is ultimately
economics that will decide the fate of ITAs.

4.1. Why do countries sign trade agreements?

4.1.1. International agreements and the contract theory

International trade agreements are contracts between states. Those contracts do not typically
single out a specific goal but rather explicitly or implicitly mix several objectives –. Those
objectives often include economic growth but the road to achieving economic growth is
unspecified. In theory, there are at least two different ways of achieving growth – by increased
efficiency or by increased employment of productive factors. These differences are also reflected
in two different perceptions of gains from trade and from international agreements. For some,
trade should increase efficiency in the allocation of domestic resources. For others trade should
lead to greater employment, especially employment of labor in countries with problems of
unemployment or under-employment.

In the literature on GATT/WTO, there are two “sources of efficiency” originating in ITAs which
are attractive to countries. The first source could be identified with contractual efficiencies. As
the primary goal of the GATT/WTO Agreements is to agree on the rules of trade, the key
contractual benefits are the clarity, transparency and predictability of commercial relations
between Parties. Their absence leads to higher costs to the contractual parties in covering
additional risk of doing business with foreign partners. In brief, ITA should reduce transaction
costs of international trade. Needless to add that this is a rather narrow concept of “operational”
efficiency since it only refers to actual transactions rather than to resource allocation.

In contrast to most other international contracts and like in standard commercial arrangements,
international trade agreements are also enforceable. Unlike most other international agreements,
international trade agreements include provisions for cases of non-fulfillment of contractual
obligations and procedures and rules for dispute resolution including compensation and remedies
for losses.43 Since they are ratified by national parliaments, international trade agreements are
usually treated and accepted by countries as legal obligations. Thus, another key attraction of
those agreements is their enforceability. It is clear that once their enforceability is put in
question, as the recent problems about staffing of the Appeals Board in the WTO testify, then the
enforceability of the whole trading system is threatened.

4.1.2. International trade agreements and economic benefits

As noted above, countries join the WTO because they expect economic benefits from the
liberalization of global markets or because they do not wish to stay behind other countries
benefiting from those liberalization measures. 44 Opening of the Chinese market and the
remarkable economic growth in China were very closely linked to China's joining the WTO. A
similar strategy was applied by the Vietnamese government to boost the country's economic
growth. Opening of the Central and East European markets and the elimination of central
planning was also a key factor in a dramatic transformation of the region.
However, these close links between membership in the WTO and economic growth have not
been experienced equally across the world. 45 This has generated a backlash from some
developing countries and calls for more attention to be paid to their interests. Moreover, the
benefits of trade liberalization were also not distributed equally in various rich countries and
have led to domestic resistance and, in the case of the United States, to a fairly dramatic
turnaround in its commercial policies. Instead, countries have been increasingly looking for
regional partners.

4.1.3. Why do countries sign trade treaties? Motives for trade treaties in economic theory

As we know from writings of Smith (2022) and Ricardo (2022) – free trade is the best
commercial policy and countries should specialize – their gains come from a specialization in
production and from gains resulting from exploiting differences in relative prices. The best
commercial policy is zero protection. One should only add the qualification that markets are
perfectly competitive and countries are “small”. Historically, the theoretical optimum
optimarum trade strategy was free trade, and unilateral free trade was optimal as countries
maximize national welfare. If agreements were to exist under free trade they would only have
sense in ensuring the stability and enforceability of free trade policies.
But ITAs exist and this must mean that perfectly free trade does not exist and that policy makers
have to address inefficiencies. For policy makers the question then is: do we seek to remove the
inefficiency by agreements with foreign countries or not?

There are at least four reasons suggested in the theoretical literature to explain why countries
sign trade treaties. The first formal explanation was given by Bagwell and Staiger
(1999), Bagwel et al. (2002) who basically related the existence of ITAs to the presence of
externalities. The specific externality to which they tie their theory is the possibility of exploiting
gains from improved terms of trade with other countries by imposing an import tariff. They
begin with an assumption that countries seek ITAs to increase their joint welfare.46 By
negotiating with other countries they seek to eliminate the inefficiency created by the existing
import tariffs. Provided that a country has enough market power, it can try to force other
countries to lower their export prices to maintain their market share. This will, ceteris paribus,
improve the terms of trade of the tariff imposing country. We shall turn to the theory in some
more detail below because it is the most elaborated and frequently used theory in discussing the
question of optimality of global trade rules.
The second reason provided by economic theorists is in their attempt to resolve the time
inconsistency problem.47 A country's preferences may change over time or governments may
change over time and so will their willingness to honor the commitments made by their
predecessors. ITAs may, therefore, provide a mechanism for locking in the country's
commitment irrespective of the political party in power. As Dani Rodrik puts it – “Trade
agreements are what enable governments to say “no” to domestic import-competing interests.
………. When there is a genuine time consistency problem, everyone is better off with pre-
commitment or delegation (save, possibly for the lobbyists and special interests).” (Rodrik,
2018, p. 81).
The third reason for ITAs is explained by the presence of imperfect competition. Imperfectly
competitive markets can give rise to profit shifting and firm delocalization, and they provide
another motive for either unilateral trade-policy intervention or search for a trade agreement.
Enlightened policy makers may seek cooperation from countries that are benefitting from
operations of MNCs at the expense of countries where the operations take place. Building on the
original contributions of Venables (1985, 1987). Helpman and Krugman (1989), Ossa (2010),
and Grossman et al. (2021) extend a model of trade in horizontally differentiated products under
conditions of monopolistic competition and introduce a second dimension of differentiation for
each brand of goods along which consumers have collective preferences. They identify
conditions under which regulatory cooperation will be desirable.
The fourth explanation for ITAs is the power of lobbyists. Here economists are obviously
moving away from pure economics into the territory of political economy or straight into
political science. Lobbying can lead to distortions in the allocation of resources as argued
by Maggi and Rodriguez-Clare (1998, 2007) and the pioneers of this argument, Grossman and
Helpman (1994, 1995). As the latter point out, the need for political viability of trade agreements
may ultimately contradict their social desirability. The presence of market distortions is a serious
problem for trade policy makers since they must be treated under competition policies – an area
which largely remains outside the realm of the WTO agreements, and they will not be addressed
in this paper.

4.2. Are the WTO agreements beneficial to countries? theoretical and empirical evaluation
of the WTO agreements
We have so far covered the reasons how economic theory has covered the reasons driving
countries to conclude trade agreements. The promising (and promised) attractiveness of the
WTO must surely explain the spectacular increase in the WTO membership over a relatively
short period of time. But how did the WTO perform? Are the agreements effective in helping the
Members in meeting their expectations? Are these agreements satisfactory, and are they optimal
from the perspective of Members?

We shall now look at the way economists try to answer these questions and asses the quality of
the WTO agreements. I hasten to add that the economic literature is very limited. The issue of
the role of the WTO agreements has been extensively treated by lawyers and political scientists
but, surprisingly, it has not been of major interest to economists. This is surprising particularly
since the current International trading system as represented by the WTO agreements is one of
the major policy instruments of global international cooperation and governance. Until a very
recent attempt to provide a theoretical blueprint for international trade agreements to which I
shall return below, the subject has been treated sporadically and sometimes only indirectly.

4.2.1. Are WTO agreements optimal? Criteria of assessment and approaches to assessing the
“optimality” of WTO agreements

Economists assess the quality of the WTO agreements in different ways using three different
approaches - (i) efficiency of resource allocation, (ii) distributional effects of the WTO and (iii)
other concepts of optimality. The first approach draws on the theory of optimal tariffs. The
second approach provides a deep criticism of the WTO by providing a new theory of industrial
protection. Finally, the third approach seeks to evaluate the contributions of the WTO to
economic welfare in some specific ways such as the contribution of trade to economic growth or
elimination of commercial risks, transparency and predictability of contracts etc.

Efficiency of the WTO Agreements. As noted above, the first formal approach was the attempt to
assess the GATT/WTO agreements in terms of efficiency of resource allocation (Bagwell and
Staiger, 1999) who take the view that countries improve their welfare by signing an agreement
with foreign countries. Without such an agreement their welfare would be lower. However, this
will only happen in their model if the agreement removes an existing source of inefficiency. The
source of improved efficiency is in the presence of an externality. For Bagwell and Staiger, the
source of inefficiency lies in the terms of trade with their trade partners, which has been
identified in the literature with an externality. 48 Notice that the critical assumption of the theory
is that countries maximize joint welfare; this is not an attempt to show how a country maximizes
its own welfare in a non-cooperative fashion.
The question of optimal commercial policy goes back to two British economists Marshall
(1890) and Edgeworth (1894) and his theory of international values.49 Their theories were the
first attempt to evaluate the effectiveness of commercial policies. 50 They offer some guidance to
bilateral negotiations and agreements by providing a framework to analyze choices of policy
makers and negotiators. Nevertheless, the theory is clearly not a strong theory of international
negotiations and of international agreements. It rests on concepts and assumptions that remain
undefined in the theory or are highly unrealistic.
The key assumption of the theory is the presence of an externality existing in a country imposing
an import tariff. As noted above, Bagwell and Staiger (1999) assume that some of the costs of an
import tariff is paid for by the tariff imposing country. However, the original idea comes
from Johnson (1953) who argued that countries sign agreements because they can use their
market power and introduce optimal tariff to change the terms of trade. If countries could freely
change the level of tariff protection of their industry without retaliation and have enough market
power to do so, they could improve their welfare by increasing their tariffs. Moreover, this may
work in agreements between countries of different strength. In agreements of large and strong
countries, this would lead to an agreement with optimal tariffs on each side, but the agreement
would not be efficient.
The second controversial issue is the question about the nature of the objective functions of
governments negotiating the level of protection of their industry with other countries. The theory
begs the question how well defined is the objective function of governments? When countries
negotiate and try to achieve their objectives – say to maximize gains from trade, it is assumed
that (i) they try to maximize national welfare and that (ii) the negotiators represent an
unambiguous agent of the population and their tastes and preferences. However, as any
negotiator will confirm, the negotiating mandates are often based on information, which is
imperfect, incomplete and provided by bureaucrats rather than directly by firms and
consumers.51 Moreover, preferences of consumers may vary over time, and they are dependent
on other factors such as income distribution. As Bekker et al. (2021) noted for the 2 country × 2
goods case, there is an infinity of optimal tariffs depending on the income distribution.52
The third major weakness of the theory is that it does not generate a unique level of the optimal
tariff. It is reasonable to assume that countries / trade partners do not retaliate against other
countries’ raising their tariffs (or not reducing them) when the former are liberalizing. Reciprocal
tariff reductions, the foundation of trade agreements, are necessary to obtain tariff reductions that
improve on a non-cooperative equilibrium.53 Thus, countries may decide to cooperate which
should stop trade wars, and it should force countries to negotiate But countries face the prisoner's
dilemma, and, with the help of game theory, a Nash equilibrium becomes a theoretical solution
to trade wars and trade agreements. But at what level of tariffs? On this point, game is theory is
mute but, as pointed out by Bekker et al. (2021) as already noted above, these problems get even
more complicated with strategic analysis. Using different objective functions affects Nash tariffs
and, in addition, the equilibrium tariffs are not stable. We must know not only the nature of the
government's objective function but, more importantly, each of the negotiating governments
must know the objective function of the other governments.54
It may be useful to point out that real world negotiations are less about tariffs but more about
market access (Bagwell et al., 2002, Rodrik, 2018). Moreover, countries might be tempted to
manipulate domestic policies with the view to change the terms of trade. In other words, the
conditions for trade flows are affected not only by tariffs but also by other trade barriers, which
change the conditions of competition between countries. This seriously complicates the design of
the optimal trade agreement since it involves designing and negotiating other elements of
policies affecting market conditions.55 In particular, the WTO is not ready to include competition
policies into its agenda.56
The theory of optimal tariff also rests on the crucial assumption about the transmission of
changes in foreign prices to domestic prices. The benefits gained by a country from raising a
tariff on imports and forcing an improvement in terms of trade and lower foreign prices must not
be wiped out by higher costs due to a poor transmission of foreign into domestic prices. This
may not be an argument about the design of the agreement but an argument about the
implementation of the agreement. The latter needs to be taken into account when designing
agreements in view of the central role of price transition in the theory.57
Finally, the dramatic rise of regionalism has exposed the other weakness of the theory – the
potential conflict between global, regional and bilateral rules and the scope of the theory to
address it. The key question is whether regional trade agreements (RTAs) (or bilateral ITAs) act
as discriminatory instruments, typically being created by special interests and lobbying or
whether they are seen as “building blocks” for a deeper multilateral agreement. Optimal tariff
theory is essentially a theory of two countries trading two goods, which greatly limits its value to
our understanding of global and even regional rules. It does not take us sufficiently beyond
establishing a multiplicity of optimal tariffs. Moreover, the equilibria established under the
theory will not be stable. Thus, the quality of RTAs has been primarily tested in empirical work
by looking at the trade promoting functions of specific RTAs.

In sum, the theory of optimal tariffs and game theory may get us a little closer to thinking about a
theory of optimal trade agreements but not far enough. The 2 × 2 goods optimal tariff model says
nothing about the nature of goods, and this is a particular handicap for countries with
heterogenous export and import structure. The empirical literature explains the tariff structure
mainly by income distribution and protection objectives even though market power, the key
feature of the model, has also been found influential. It also does not explain the current
preference for regionalism over multilateralism.

4.2.2. Distributional effects of the WTO

We shall now briefly look at the second most important contribution to our understanding the
formation of international agreements and their features. One of the most prolific and well-
known critics of the efficiency enhancing property of ITAs is Harvard professor Dani Rodrik. D.
Rodrik has a broad criticism of what has been known as “The Washington Consensus” but here I
shall only refer to his criticism of ITA. While recognizing the advantages of free trade in theory,
he emphasizes the distributional effects of ITAs (Rodrik, 2018). He makes a valid and strong
point when he stresses that ITAs create winners and losers. In addition, he strongly believes that
ITAs are driven by special interests, and those interests are fundamentally different today from
what they were the past, when the ITAs were driven by the interests of import- competing
industries. With the almost complete elimination of tariffs and quotas over time, modern ITAs
are driven by export interests of MNC, banks, pharmaceuticals and the likes. Furthermore, the
promotion of those interests was enhanced by expanding the agenda and content of ITA beyond
tariff and quotas.58 At the same time, the protection of domestic industries has taken new
dimensions of the form of various “behind-the-border” measures (NTB) (Rodrik, 2023). In brief,
he has serious objections against what has constituted one of the fundamental goals of the WTO
– a reduction of protection of domestic industries.
In emphasizing the distributional effects of ITAs, which we must do, Rodrik goes even further
when he claims that efficiency does not matter but distribution of benefits does. He refers to the
work of Caliendo and Parro (2015) and their assessment of the welfare effects of NAFTA and to
Hakobyan and McLaren (2016) on the distributional effects of NAFTA. Caliendo and Parro
conclude that NAFTA increased US welfare by a small margin (0.08 percent). Moreover, they
find that half of the gain came not from an increase in efficiency but from an improvement in the
US terms of trade, that is, at the expense of other countries, mainly Mexico. He also quotes the
conclusion of Hakobian and McLaren who find very sharp adverse effects for certain groups of
workers. High school dropouts working in industries that were heavily protected by tariffs on
Mexican exports prior to NAFTA experienced a drop in wage growth of as much as 17
percentage points relative to wage growth in unaffected industries.

If the losers were to be fully compensated, then the efficiency property of ITAs is maintained.
However, those kinds of compensations are rather rare in real life, and Rodrik is right to raise the
issue. But he goes even farther with his argument. To quote, “….how did they weight the gains
and losses to reach a judgment that US citizens would be better off “on average”? Did it not
matter who gained and lost, whether they were rich or poor to begin with, or whether the gains
and losses would be diffuse or concentrated? What if the likely redistribution was large
compared to the efficiency gains? What did they assume about the likely compensation for the
losers, or did it not matter at all? Perhaps the experts viewed distributional questions as
secondary in view of the overall gains from trade.”59
To design a system of rules tied to preferences of different income groups within a country is a
superhuman task given our knowledge and analytical skills in consolidating moral, economic,
cultural, ethnic, gender and other values into a government negotiating position and given our
current level of technology. To try to do so in negotiations with other countries must today be
well-nigh impossible. To perfectly predict and measure distributional effects, especially those
that are unwanted, is an equally difficult task. There is no market to evaluate preferences in such
detail, and, in designing the optimal ITA, and the only solution for economists is to either
assume that they are likely the outcome of a Q&A process between governments and all
economic agents or by carrying endless surveys to estimate the values of preferences in different
incomes groups. Even if such standards for different income groups were established, the
enforcement of a non-violation clauses for such standards will require so much high-quality
information, including information about externalities, which is unlikely to be available to any
adjudicating authority.

This takes the argument to the role of lobbies. Lobbies have clearly played a role in policy
making for centuries, but perhaps the most publicized work on their role in international trade
and in international trade negotiations are the contributions by Grossman and Hellman
(1994, 1995 who were the first to formally identify both the possible mechanisms of lobbying
and the effects of lobbies on trade flows as well as on the government's negotiating positions and
the formation of different interest groups. Their interest was to assess the role and power of
MNCs, which they saw as the key to understanding the shape of commercial policies. MNCs
undoubtedly play a powerful role in shaping commercial policies of their home countries, but
how effective they are in influencing international trade standards is not effectively demonstrated
by empirical evidence. Moreover, as Bhagwati (2005) pointed out, lobbies operate not only to
promote interests of MNCs but also to promote the interests of powerful lobbies of NGOs which
seriously affect the agenda of international negotiations, as we see in the WTO.
The freer trade orientation of the International trading system has not been uniquely shaped by
the interests of MNCs over the last 70 years or so. Open market trade strategies after World War
II have been shaped by strong lobbies representing consumers, workers, and small businesses. In
the developed countries, this reflected their fatigue from, and losses in, the war and was
supported by generous financial assistance from the US. In the post-communist world, it meant
freedom and integration into the global market-based economy. Financial assistance played a
role, but this was not as comprehensive and large as the Marshall Plan. South-East Asia, too,
welcomed new market openings especially once it was carried by the dynamism of China
following Deng's reforms and by GVC. Africa and most of Latin America joined in order not to
be left behind while hoping for financial assistance. Governments had strong mandates from
people in all those countries. The integration of Europe has meant that, inter alia, special interests
were no longer only pharmaceuticals or GOOGLE as claimed by the lobby-theorists but also by
Brussels or, for example, by Paris as we have recently seen in the cases of taxation of their
activities in markets in which they operate but in which they are not tax-residents. Profit shifting
and tax avoidance are becoming more complicated.

Not surprisingly, Rodrik's views have run against a considerable opposition not only from the
WTO, the IMF and the World Bank but also from many academics, the supporters of free trade,
competition, limited state interventions. The list of critics and their criticism would require a
separate paper. It may suffice to indicate the nature of opposition to his work by a quote from his
own article: “When I recently gave a talk arguing that economists underplay some of the
adverse consequences of advanced globalization, an economist in the audience took me to task:
Don't you worry, he asked, that your arguments will be used (or abused) by populists and
protectionists to further their own interests? It is a reaction that reminds me of a response from
a distinguished economist more than two decades ago to my 1997 monograph Has Globalization
Gone Too Far? All your arguments are fine, he told me, but they will give “ammunition to the
barbarians.” (Rodrik, 2018, p. 88)
Finally, what the debate about his work brought forward as an important issue is the fact that the
usual approaches to assess international trade agreements by means of Pareto optimality may not
resolve our disputes. While Pareto optimality can help identify efficient and inefficient
outcomes, it cannot capture all the relevant aspects of welfare and distribution. Other criteria
may be needed to complement Pareto optimality in evaluating trade agreements.

4.2.3. Optimal investment agreements

Various distortions arising from international economic agreements such as unequal distribution
of the costs of trade adjustments have been recognized and widely discussed in debates about
optimal bilateral investment treaties. Those debates are obviously not about trade protection but
about another policy intervention – the protection of foreign investors and the rights to regulate.
The OECD, which has been deeply involved in debates about MNCs and about FDI, reviewed
what they call the alleged societal benefits and costs of International Investment Agreements
(IIAs) as suggested by academia, governments, business and civil society. No attempt was made
to identify the optimal investment agreement in that study.60
Such an attempt was first made in the recent paper by Horn and Tangeras (2021). The current
system of international investment agreements (IIA) may lead to “regulatory chill” in host
countries even if regulation is in both parties’ interests and it may also lead to lower than optimal
FDI from investors. In their model, countries negotiate the circumstances under which
compensation should be paid, and when the host country can regulate without compensation.
They show that: (i) Bilateral investment treaties (BIT) can be designed in such a way that they
fully mitigate distortions both to foreign investment and to host country regulation; (ii) those
agreements will not cause under-regulation from a joint perspective; (iii) agreements will include
investor-state dispute settlement; (iv) North-South agreements will solve the inability of the
South to protect inward investment, while North-North agreements solve Prisoners Dilemma
problems with regard to investment protection for reciprocal investment flows, benefitting
investors at the expense of the rest of society. In brief, they show that an optimal IIA agreement
can be reached by incorporating the known distortions into the existing agreements.
The Horn and Tangeras model is interesting because it seeks to define the Pareto optimal
outcome and Nash efficient distribution between the host and home country. This is basically the
first formal theory of an optimal IIA, but, as all new theories, it has limitations. 61 First, their
approach avoids the pitfalls of the terms of trade approach of assessing trade agreements by
identifying externalities ex ante that each party can use in negotiations. But this means that those
externalities must be known in advance of the negotiations. Second, the optimal outcomes (the
intervention by the host country depend on the parameters of the model and their stability; Third,
as with any system of financial compensations for expected foregone profits, it heavily relies on
our ability to observe and verify those profits. Compensation in the WTO for losses due to
violation of commitments is more robust; Fourth, shocks generating various externalities must be
independent of the commitments made in the IIA; and, finally, the model is subject to much of
the same criticism that was discussed above with regards to the optimal tariff literature
(representative agents, objective functions, implications of different income distributions).

4.2.4. Effects of agreements on trade flows - empirical evidence

Finally, we briefly comment on the empirical evidence on the effects of international trade
agrements. The empirical work about the effects of WTO on trade remains limited, controversial,
and often reaching contradictory conclusions. Rose (2004), who was the first to examine this
issue, finds no significant effect of the WTO Membership on bilateral trade flows and on
diverting trade from Members to non-Members. His-conclusions are not supported
by Subramanian and Wei (2007), who argue that the WTO Membership does increase trade, but
unevenly, with developing countries in particular not benefiting as much as developed countries.
Positive results have also been found by Felbermaier and Kohler (2010), Change and Lee
(2011) and Dutt et al. (2013), and more recently, Yotov et al. (2019) who find a positive and
strong trade promoting effects of the WTO Membership. 62 There is plenty of evidence that, on a
global level, the contribution of market openings together with conducive policy measures have
been highly positive.63
These results have been challenged by various writers such as Amsden (2010) and Roy (2011).
The latter finds no statistically significant effect of the WTO Membership once country and time
fixed effects are included in the gravity model. Over the years, the OECD, The World Bank,
WTO and even the IMF have been examining the relationship between regional trade agreements
and the multilateral trading system, and their empirical evidence of the effect also reports mixed
results. The studies covered specific regional trade agreements (RTAs) provisions, such as the
treatment of agricultural issues, technical regulations, standards and conformity assessment
procedures, investment provisions affecting the international transfer of technology,
developments in the inclusion of environmental considerations and approaches to market
openness in the digital age and so on. Many studies have been done on the effects of RTA on
trade and, more broadly, on economic growth of member states. 64 There have been some
attempts to evaluate the welfare effects of RTA on non-members, but those efforts are very few
(e.g., Winter et al., 2017).
It is true that WTO Membership itself was not a guarantee of economic growth for many other
countries.65 For Rodrik, then, it represented the failure of the Washington Consensus (trade,
liberalization, free movement of capital flows, privatization and financial liberalization and fiscal
and monetary discipline) to produce the promised growth and development in many countries,
and the models of economic growth on which it was premised, and it represents an indictment of
contemporary economics or its preference for market solutions. This view remains a minority
position.66
However, it is also beyond any doubt that open-market policies including membership in the
WTO have been a critical and important element of policies leading to the success of China in
the last three decades or so.67 Similarly, those policies have been helpful in the rise of South East
Asia (South Korea, Indonesia, Thailand, Laos, Vietnam, Philippines), Central Europe (Czechia,
Slovakia, Poland, Romania, Latvia, Lithuania and Estonia), and even in Latin America for
countries like Chile. None of these countries were hurt by open trade, they mostly benefitted. 68
In sum, what the empirical literature shows convincingly is that trade and ITAs have been the
necessary condition of success as measured by economic growth and the growth of the standard
of living in countries noted above. Both the theory and the empirical literature are less
convincing in identifying trade as the origin of those successes as well as of economic failures.
The future of our understanding lies in deepening research into areas such as linkages between
trade and productivity or trade and domestic resource mobilization. 69 Various studies indeed find
more evidence of positive link between trade and investment on the one hand and productivity
and innovation on the other.70

5. Conclusions and prospects for the future. where do we go from here?

The answers to the concerns about threats to the international trade agreements must obviously
be taken very seriously. They must take into account the changes in the global economy in recent
years. Covid, the war in Ukraine, growing political instability in Central Africa, break up of
GVCs, emergence of “subsidy wars”, serious macroeconomic instability in many developed
countries and in other parts of the world constitute major shocks to the global economy. Those
shocks damaged or interrupted international trade, which has been the engine of global economic
growth over the last three decades or so. There are already many initiatives addressing these
issues to facilitate the functioning of global trade.71
But the external shocks are not the only threat to the ITS. The other, and arguably even a more
serious threat to the ITS is the fragility of the WTO agreements and the governance of the
WTO itself. The agreements are incomplete contracts with missing rules on important economic
activities and policies which destabilize international trade. The most important and obvious
missing elements are global rules on international investment and on state-owned enterprises.
Given the rise of China as a super-power and an economy with an extremely high share of state-
owned enterprises it is time to negotiate with the Chinese rules that will establish their true
financial independence, the rules for support by the state and that will increase the transparency
of their operations. In addition, while the bulk of the WTO rules is seen by most observers and
experts to be effective, there are rules which have been subject to a considerable criticism. In
particular, the provisions for protection of “strategic interests”, rules concerning agriculture,
subsidies and other instruments of industrial policies will need to be rethought if the WTO
should move ahead.
The agreements are clearly not fully satisfactory as the benefits from the agreements have been
limited. Some countries are better off because of their open market policies and their WTO
membership, in other countries the benefits are not as obvious. On the other hand, the reductions
of tariff protection and the elimination of most quotas have been also responsible for
maladjustment in many countries, including the ones which, on the whole, benefited from those
policies. There have been winners and losers from the process, with limited attempts to
compensate losers, and in countries with such policies, the compensations were not implemented
effectively. Countries like China, Vietnam, Southeast Asia, Central and Eastern Europe have
clearly hugely benefitted, many countries in Africa and elsewhere quite evidently lagged.
Moreover, the beneficiaries of the agreements have also changed over time. New trade
agreements are sought by traditional supporters of old trade agreements but outside the WTO,
i.e. subject to rules that are not part of the existing WTO jurisdiction.

Economic theorists have applied at least three different theoretical approaches to evaluate
international trade agreements (ITAs) – terms of trade theory, a distributional approach to the
theory and to the design optimal investment agreements. Each has its strengths and weaknesses.
The theory of international trade agreements has gone away from the purity and from the static
framework of the Ricardian economics and what it implies for efficiency of resource allocation.
We now have theories about rational trade negotiations. When discussing the current trade
conflicts and trade wars, Bekker et al., 2021. summed up their views on the rational theory of
trade: “War, what is it good for?” To quote Edwin Starr, in the Norman Whitfield/Barrett
Strong penned Motown classic: “absolutely nothing”. Even if the idea of a (positive and
normative) representative agent made sense, and even if some possible government was willing
to act on the preferences of that agent, and even if that government possessed the knowledge of
the economy necessary to calculate an optimal tariff for itself, and even if it possessed similar
knowledge about its trading partners so that it could calculate its part of a Nash equilibrium (in
confidence that all other governments were doing the same, and in confidence that they were all
coordinated on the same Nash equilibrium, which is taken to exist), we would have to believe
that all of these things applied, at least approximately, to some specific set of existing countries
in some specific interaction. Without all of these things being true, the idea of an actually
existing Nash equilibrium tariff schedule is literally nonsense. So, as a practical matter, the
theory of rational trade wars cannot tell us about actually existing trade wars. Perhaps more
importantly, the notion that it tells us anything about the trade policy of the Trump
administration with, say, China (or Europe, or its NAFTA partners) (is) literally beggars’
belief. It only remains for me to add that what holds for rational trade wars holds even more
likely for “optimal trade agreements”.

5.1. Where do we go from here?

Observation 1- Diverging interests of countries. Agreements are as good and effective as is the
willingness of their signatories to cooperate in reaching the given common goal. The Uruguay
Round negotiations (and the previous ones) were driven by the common interest of countries in
building a new international trading system (ITS) and in opening their economies to stimulate
their economic growth. Are the WTO Members driven today by the same commonality of
interests?
Very unlikely. As Rodrik (2017) points outs, the WTO members are divided. He argues that the
countries include those that push for increased role of governments to deal with social inequity in
their countries, public health, clean energy transition, etc. He further speaks of the “realists”
whom he identifies with countries that see international relations as zero-sum game. Economic
interdependence is not a matter of mutual economic gains but a weapon to cripple your
adversary. He also recognizes those countries which maintain their neoliberal position.
Developing countries often look critically at the WTO, which they take as promises a-la
Akerloff's “bitter lemons”. The classification of countries is not very important; what is
important is to recognize that the driving forces of WTO membership are different, and this is
already evident from the agenda of meetings and the ongoing negotiations.72
I am not as concerned as are sceptics like Bown, Bagwell and Staiger (2016), Winter et al.
(2017), Rodrik (2017) or other writers or commentators. First and foremost, the driving force of
global integration is not going to vanish. We live in a complex web of interdependences in the
international economy, mobility of capital and labor, and unparallel access to information.
Telecommunication, transportation, and digital and AI technologies have moved too far to be
stopped. Moreover, global integration and removal of trade barriers have brought tremendous
benefits to many countries (e.g., China and its rapid elimination of poverty is probably one of the
greatest economic successes of our times). What all this means is that countries will continue to
be inter-dependent, and this will call for a system of governance of their relations – for
international agreements.
To make further progress in economic integration may require a slowdown in the process of
globalization and of deepening multilateral rules. At least, for some parts of the world. First,
given differences among countries in terms of their institutional readiness and strength in
adopting and effectively implementing global rules, it will not be possible to apply the same set
of rules for all countries at the same time and for all economic activities and policies.
As Hoekman et al. (2023) convincingly argue, the issue of dealing with national security
interests and other non-economic objectives such as sustainability or climate change will require
an approach to trade issues more in the framework of like-minded countries.
Second, income differences, broadly speaking, among countries are critical in determining the
negotiating strategy. For example, trade in rich countries is sought as a vehicle to increase
domestic welfare. In contrast, the priority of poor countries for trade is typically presented as a
vehicle for employment generation, which, in turn, would address the critical issue of under-
development – poverty. Given the state of full employment in most rich countries and their
generous public support for unemployment, the rich countries should continue to seek efficiency
gains rather than an increase of employment. The poor countries’ interests should also seek
efficiency gains from trade and target employment through domestic policies and seeking aid for
institutional support from the rich countries.

Third, income differences among countries should also affect their treatment of public policy
issues in international negotiations. Issues such as child labor or externalities such as pollution
do not always command the same degree of policy interest in poor countries as they do in rich
countries. They can and should be legitimate issues for agreements among rich countries. In
trade between rich and poor countries, those issues should be specifically targeted and tied to
foreign aid.

Fourth, the drive for deeper integration comes from the EU, the US and other rich countries. The
depth of their agreements will be driven by their specific conditions. Trade relations of poor
countries with rich countries can best be promoted by bilateral/plurilateral agreements each
designed to suit interests of both parties and with adequate support from the rich countries to
poor countries for their institutional strengthening. The starting position for all those separate
agreements should be derived from the fundamental condition of non-discrimination as defined
in the WTO agreements and the countries commitments in the WTO. Any international
negotiation involves impingement on national sovereignty. It is important, therefore, that future
international trade agreements must be seen as providing sufficient benefits to compensate
countries for the costs of losing some independence.

The critical issue will be the relations between the US and the EU with China. In this case, it will
be important to address the specific areas of disagreements. This must mean, above all,
negotiations and an agreement on rules providing market-based rules disciplines for state-owned
enterprises, well in excess of the existing WTO rules on state trading. A direction in which the
negotiations should proceed is suggested in Annex 1. It will also be necessary to strengthen the
existing WTO rules on subsidies. Other areas of contention will include Intellectual Property
Rights (IPR) and labor codes, especially with reference to the existing International Labor Office
(ILO) agreements. It will be necessary to link those negotiations with negotiations about global
financial stability in general and about a resolution of debt repayments by poor countries.

The future of the current international trading system is under threat but the patient is not
terminally ill and it can be cured by understanding its weaknesses. My proposal is to move
forward to deeper integration at different speeds. The negotiations should be conducted by like-
minded countries in order to maximize the probability of success in the negotiations. Irrespective
of the degree of ambition, the starting position should be the commitments made by the countries
in the WTO including an emphasis on nondiscrimination and open markets. Success stories of
countries opening up to trade is simply too powerful to be disregarded.

5.2. Asia and the ITS

Key negating areas. The international trading system has many imperfections. At present, the
most serious WTO issues are unresolved issues of treatment of state-owned enterprises (SOE) in
the WTO legal structure and the highly controversial issues of technology transfer, industrial and
foreign investment policies. None of these issues is adequately regulated by a multilateral
agreement and its norms.
Recommendation. Asian countries need to recognize that SOE can provide unfair competition to
privately owned firms and should, therefore, be subjects to the same rules of competition. The
international conformity of rules is the underlying principle of the WTO rules, which were
designed to regulate privately owned firms.
Asian countries should recognize that countries have different negotiating positions vis-a-vis
foreign investors. Size or income level or institutional factors of host countries are not the only
drivers of FDI. Subsidization of FDI by home countries or other factors influencing foreign
investors’ decisions such as corruption will also affect the profit prospects for foreign investors
and may, therefore, influence the investment decisions of investors. Given the high level of
global engagement of foreign investors, it would be highly desirable to improve the regulatory
system for foreign investment. This should lead to deeper engagements of the countries in
negotiating FDI agreements.

Finally, given the turnaround of the US on industrial policies, Asian countries will inevitably be
also affected, primarily through the effect of those policies on global value chains (GVC). The
countries should, therefore, explore ways of switching suppliers affected by changes in the US
policies or upgrading GVC.

Role of China. On these policy issues, the debate will inevitably have to address the role of
China, its SOEs and its industrial and foreign investment policies. While China proclaims to seek
stability in trade relations, its policies – especially on SOEs and technology transfer have
introduced an element of unfair competition and instability into global trade. The size of the
Chinese SOE sector is far too large and important, which seriously affect competition not only in
the Chinese market but also abroad. China continues to be a big market for Asia which must
continue to seek enhanced engagements that are of mutual interests.
In addition, an all-regional approach to deal with China is hampered by conflicting interests of
China. China has been increasingly playing a more active role in trade with Russia, Iran, and
North Korea, and this may weaken its relations with the rest of Asia. It diverts some of its trade
to these countries from other markets. China's interest in those three countries may also run
against the interests of some Asian countries. In the WTO, China finds itself on the side of
countries against which international community declared trade sanctions. In brief, the
conflicting interests of China pose a major problem for a regional approach, but they also
weaken China role in the WTO.

Negotiating platforms. China has trade agreements in Asia and the Pacific with ASEAN,
Australia, South Korea, New Zealand, Pakistan, Singapore and the Chinese special
administrative regions of Hong Kong and Macau. It is clear that, except for ASEAN, there is
currently not enough space for an all-Asian regional approach to address any trade issue.
The preferred route of Asian countries in negotiating trade deals seems to be preferential trade
agreements (PTAs). The Asia-Pacific region continues to be the largest contributor to the
worldwide build-up of PTAs, accounting for about half of PTAs worldwide. The most common
policy areas in Asia-Pacific PTAs outside preferential tariffs are ‘trade facilitation and customs
cooperation’ followed by ‘competition policy’, and ‘intellectual property’, all now found in more
than 50 % of the signed and enforced PTAs. 73 SOEs are not on the agenda in those PTAs and
technology transfer, foreign investment and industrial policies are only covered sporadically or
superficially.
SOEs and the WTO route. Regarding negotiations of new rules of SOEs, Asian countries should
recognize and seek negotiations with China to introduce acceptable rules consistent with the
WTO principles of non-discrimination and transparency applicable to bona fide privately-owned
firms. The area of particular importance is the WTO Agreement on Subsidies and Countervailing
Duties which is clearly out of its reach with its current provisions when it comes to the treatment
of SOEs. This will have to take the negotiations of the SOE issue to the WTO to ensure
compatibility and consistency of WTO rules on subsidies, even though the issue is unlikely to be
welcome by many developing countries which often heavily rely on SOEs’ operations.
Moreover, the WTO route on SOE also comes out from the existing system of PTAs, which are
fragmented. A topic as important as SOE cannot be negotiated bilaterally but will require as
large number of negotiating participants as possible.
Technology transfer, FDI and industrial policies - a regional approach? Technology transfer,
industrial and FDI policies will require a different approach. These policy areas are closely
related to security interests of countries, and the critical question is again the forum through
which Asian countries should pursue their interests -should it be the WTO or a regional
 platform? There are reasons to believe that a regional approach to negotiate with China should be
sought by Asian countries to negotiate in these areas.
While China is clearly very interested in maintaining good relations with the WTO, the WTO is
unlikely to be the best platform in these areas. One reason is that security interests are already
amply covered by WTO agreements, but they evidently do not provide enough legal power to
prevent slippages and adoption of protective measures on security grounds. The second reason is
that, when it comes to security interests, we can quote Communist Party Chief Xi Jinping who
insists on “Asian security should be maintained by Asians”.74 Furthermore, the absence of a
multilateral investment agreement in the WTO obviously opens the room to other negotiating
platforms.
Finally, the close ties between ASEAN and China when it comes to GVC make a regional route
logical. Given the fragmentation of the Asia and the Pacific region noted above and the size of
the Chinese economy, it is unlikely that bilateral regional approach in Asia to negotiations with
China would be effective in addressing the key issues of GVC at this time. But the region could
start with ASEAN, which could invite other Asian countries to carry out those negotiations as
“friends” of ASEAN.

CRediT authorship contribution statement

Zdenek Drabek: Conceptualization, Formal analysis, Investigation, Methodology, Project

administration, Resources, Supervision, Validation, Visualization, Writing – original draft.

Declaration of competing interest

The author declares that he has no known competing financial interests or personal relationships
that could have appeared to influence the work reported in this paper.

ANNEX. 1: ISSUES FOR NEGOTIATING GLOBAL RULES FOR SOEs

Competitive Neutrality: Some Basics Cost allocation transparency

 •
What type of policy mandates should be compensated? (Cost allocation transparency)
 •
 What methodologies should be used to appropriately allocate costs between commercial and
noncommercial activities? (Compensation of policy obligations)
 •
Assuring debt neutrality, what is the value of an implicit government guarantee? • What is an
appropriate benchmark for assessing return adequacy? (Compensation of policy obligations)
 •
What is the value of a legally created captive home market? (Debt neutrality)
 •
Valuing compensation: What about in-kind benefits such as free land? (Similar tax, regulatory,
and procurement rules)

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Paper prepared at a request from an academic journal but directed primarily to policy
makers and students of international trade and investment agreements. The author is
grateful for intellectual encouragement to address the topic and for useful comments to
prof. Joe Brada, Arizona State University, prof. Ch. Bellak of Vienna University, prof.
Tomer Brode, Dean of Law Faculty, University of Jerusalem, Bernard Hoekman, The
 European Institute, prof. Douglas Irwin, Dartmouth University, prof. Petros Mavroidis,
Columbia University, Florence, Sam Laird, WTO and Peter Rashish, Johns Hopkins
University.

It is debatable whether the impressive liberalization was due to the GATT/WTO

negotiations and agreements and/or to what extent this reflected autonomous
liberalizations after the war or push by the IMF as recently argued by Irwin (2023). Be
that as it may, the tariff reductions ended up as the goal of the GATT and WTO
negotiations. The post-war 40% tariff level was also questioned by Bown and Irwin
(2015).
2

It is important to note that the international trade system as discussed in this paper has
been under threat for much longer. It was already in 2013, and, in his related writings
before that, Jagdish Bhagwati (2014), the true doyen of the trade economics profession,
warned the professional community about threads to the WTO system of multilateralism.

Dani Rodrik, one of the most prolific observers and critics of the ITS, identifies the pre-
crisis ITS as “hyper-globalization” and some adjustment in the ITS is evidently needed.

See Annual Reports of the WTO as well as specialized reports on GVC both by the WTO
and in OECD.
5

The Biden administration adopted a bold “Modern American Industrial Strategy”,

consisting of three pillars: The CHIPS and Science Act, Aug,9, 2022, The Inflation
Reduction Act, Aug.16, 2022 and The Bipartisan Infrastructure Law, Nov.26, 2021. The
EU started even earlier with its ambitious Industrial Strategy for Europe in 2020,
targeting the transition to a green and digital economy.

6
 The WTO claims success in stimulating dialogue and negotiations, but most of the efforts
have not passed working groups such as the proposal for reforms of fossil fuel subsidies
or on plastics pollution and plastics trade.

For more details of, for example, the results of Bali Ministerial Conference in 2013
see http://dx.doi.org/10.13140/RG.2.1.4778.8562 and http://dx.doi.org/10.13140/
RG.2.1.4778.8562 for the most recent 12th Ministerial Conference in Geneva, 2022.
8

See also more discussion of this issue in Section 3 further below.

9

For more details in trends of regionalism, as identified already 20 years ago, see, for
example, Robinson (2003}.
10

For more details, see for example, The WTO Appellate Body Crisis: How We Got Here
and What Lies Ahead? - JURIST - Commentary - Legal News & Commentary.
11

Romania and Hungary followed Czechoslovakia and their membership posed the same
issues.

12

For China, the continuing reliance on SOE together with its policy of forced technology
transfer constitutes one of the major problems for the global trading order. See Mavroidis
and Sapir (2021).
13

See, for example, Baum et al. (2019) on corruption in SOEs and on concerns about their
inefficiencies Alvarez et al. (2017) or Malmstrom (2023) and Krueger (2023).
14

See Woo (2006) who provided one of the first l pieces of evidence showing the extent
and perversity of protection via subsidies provided through the banking system.
15
 Sources: OECD 2012, OECD 2016 and OECD 2018a and 2018b. See also IMF (2020),
especially Figure 3.22 and Ch.3. See also Alvarez et al. 2017 and Woo (2006).
16

A part but a particularly serious problem is the expansion of the agenda to “non-trade
issues” to address non-economic objectives including national security interests,
sustainability issues, climate change and public policy matters. The analysis of the trends
and proposals for a solution can be found in Hoekman et. al., (2023).
17

The World Bank has established a detailed data bank of deep RTAs (Matoo et al., 2020).
18

See Public Citizen, April 2018. 27 BITs of the EU states with each other were also
terminated and replaced by uniform EU legislation. The age of intra-EU BITs came to an
end. The Canadian Institute for Sustainable Development even provides advice on how to
terminate BITs (IISD, 2020).
19

For more details, see, Panagariya (2005) who also provides a rather optimistic picture of
the Agreement on Agriculture in the WTO.
20

See The Global Public Procurement Database, The World Bank, 23 March 2020.

21

Article XVIII:B (para. 9) omits the word “imminent” from the first condition and refers
to an “inadequate” level rather than a “very low” level of reserves; “adequate” is defined
as “adequate for the implementation of its program of economic development”. A similar
argument can be made regarding provisions arising from supply shocks such as the recent
events after Covid and the war in Ukraine. Governments may over-react when faced with
supply shocks. They may take measure that make operations of GVC even more
complicated. A suitable adjustment mechanism agreed under international rules would
help.

22
 The emerging friction makes observes call for new negotiations between the
two superpowers on a “new rules-based framework that facilitates innovation and ensures
market openness”. See Sheng (2023).
23

See, for example, Palmeter, et al. (2022) or Jackson, (2017) or Broude (2011).
24

Chad P. Bown of the Peterson Institute makes the point poignantly to the Washington
Post. "It's not only the subsidies that are in the Inflation Reduction Act for electrical
vehicles or the Chips Act for semiconductors, but also export controls. All of that is also
for national security purposes.... All of these policies are interrelated." Pari passu, Art.
XX of GATT is often seen as not providing enough clarify for Members to take national
climate measures. Bown (2023)
25

The two case cases are Russia – Measures Concerning Traffic in Transit and Saudi
Arabia – Measures Concerning the Protection of Intellectual Property.

26

The actual ruling was adopted on November 6, 1998. Nevertheless, Malaysia persisted in
their complaint and initiated new proceedings against the U.S. in 2001, but the U.S.
prevailed in those hearings.
27

In the meantime. Committee on Trade and Environment generates ideas for future
negotiations (e.g., plastics pollution and plastics trade, fossil fuel subsidies).

28

The World Bank: Trade and Climate Change, September 2021.

29

The rise of the East Asian “miracle” is usually attributed to particular forms of industrial
protection extensively reviewed in many World Bank publications and internal
documents.

30
 See Krueger (2023.
31

See Footnote 12 above.

32

WTO (2022).

33

According to internal WTO studies, the level of compliance in the case of notifications
was less than 50% for all developing countries commitments in 2005-6. For another
systematic treatment see Karlas and Parízek (2020).
34

See also Drabek (2010).

35

Needless to acknowledge at the same time that developing countries often claim that the
WTO rules are suitable for rich countries and discriminate against developing countries.
For example, the Agricultural Agreement allows Members to provide various kinds of
domestic support with high financial contributions from governments while agriculture in
poor countries is typically not protected or supported by their governments. Moreover,
those governments would not be even in the position to finance such supports.

36

The special provisions include longer time periods for implementing Agreements and
commitments, measures to increase trading opportunities for developing countries,
provisions requiring all WTO members to safeguard the trade interests of developing
countries, support to help developing countries build the capacity to carry out WTO
work, handle disputes, and implement technical standards, and provisions related to least-
developed country (LDC) Members.

37

Prof. Jagdish Bhagwati has been the main critic of the attempts to expand the agenda
beyond pure trade issues. See, for example, Bhagwati (2005) and Bhagwati and
Panagariya (1999).
38

The major proponent of the criticism is professor Dani Rodrik of Harvard who also has a
considerable experience from the Geneva -based negotiations. Other critics include, for
example, M. Khor, M. Edelman, T. Pettinger. See, for example, Khor 2023.
39

Once again, the major proponent of this theory is prof. Rodrik.

40

Anne Krueger, for example, was an early supporter of deregulation. She placed emphasis
on the need to remove trade barriers and to deregulate domestic economies in (Krueger
2012).
41

Criticism of WTO is broad ranged and much of it has already been covered above. As the
aim here is not to review the critical literature, it may suffice to say here that the criticism
of the WTO comes both from the “right” and the “left”.

42

The measures are: (1) The CHIPS and Science Act (CHIPS Act), Aug.9, 2022, US$ 53
billion; (2) The Inflation Reduction Act (IRA), August 16, 2022, US$ 738 billion and (3)
The Bipartisan Infrastructure Law (BIL), Nove. 26, 2021, US $ 840 billion. Those are
clearly major interventions of the US government into the operations of markets. For
more details and discussion see Bown (2003).
43

I am referring here to an alternative explanation of political scientists and their theory of

trade agreements, which focuses on the use of external enforcement under a trade
agreement to discipline domestic politics.

44

For more details see Staiger and Tabellini (2002) who provide an economic analysis and
justification for the purpose and design of the GATT/WTO. See also Drabek (2010).
45

The empirical evidence is discussed in more detail further below.

46

Jumping a little ahead, notice that a country does not seek an ITA in order to increase its
own welfare but joint welfare. Bagwell and Staiger justify their position by arguing that
countries in the WTO must aim for joint welfare as the goal given the key conditions of
the WTO – reciprocity and non-discrimination.

47

For a formal presentation of the theoretical argument see, for example, Staiger and
Tabellini 1987; Maggi and Rodriguez-Clare 1998.
48

The sources of inefficiency can vary. In a parallel and similar debate about international
investment agreements, Ossa et al. (2020) take a different approach by analyzing the
efficient choice of dispute settlement stipulations, Stähler (2018) draws on mechanism
design to characterize an efficient compensation mechanism, Aisbett et al. (2010) show
how a carve-out scheme under which investors receive compensation in excess of
foregone operating profits. In his earlier work, and drawing on work by Krugman and
Bagwell and Staiger, Ossa (2020) is identifies another source of externality by means of
the production relocation effects between countries that mutually engaged in FDI.
49

Edgeworth (1894) applied the analysis of reciprocal demand and terms of trade to a case
with many goods and countries. His aim was to illustrate the effects of trade on welfare
and prices but he also discussed the conditions for free trade to be Pareto optimal and
hence the role of commercial policies.
50

Edgeworth(1894) and Marshall (1890) sought to identify the volumes of exports

countries were willing to import in exchange for their exports at different relative prices
affected by commercial policies.
51

However, Bagwell and Staiger (2009) claim that the terms-of-trade rationale for a trade
agreement holds as well when governments have political motivations. This brings
forward even more complicated questions about transmission of preferences in systems
with different systems of political governance.
52

The issues are, of course, how representative is the “representative agent” and how
similar are preferences.

53

To recall, reciprocity together with non-discrimination are two key WTO principles.
They are the two key assumption of Bagwell and Staiger in their original work on the
GATT.

54

This is discussed in more depth by Bekker et. al (2021), p.10.

55

This is ok for Bagwell and Staiger who interpret market access commitments in the
GATT/WTO as commitments to conditions of competition between exporting and
import-competing firms. Bagwell and Staiger (2002) provide a formal definition of
market access within the context of the terms-of-trade theory of trade agreements.
56

Take the case of competition policy. As Anderson et al (2018) point out, whereas decades
ago, anti-competitive practices may have been one of the main criticisms of those who
believe in the efficiency viewed mainly as a domestic phenomenon, most facets of
competition law enforcement now have an important international dimension. … efforts
to establish a general agreement on competition policy in the framework of the
international trading system have been unsuccessful even though provisions relating to
competition policy are incorporated in the WTO; the General Agreement on Trade in
Services (GATS); the Agreement on Trade-Related Intellectual Property Rights (TRIPS
Agreement); the Agreement on Trade-Related Investment Measures (TRIMs Agreement);
and other WTO instruments.
57

Bagwell and Staiger (2012) consider several trade models that feature imperfectly
competitive markets and argue that the basic rationale for a trade agreement is, in fact,
the same rationale that arises in perfectly competitive markets, driven by the principles of
reciprocity and nondiscrimination. They continue to believe that the only rationale for a
 trade agreement is to remedy the inefficient terms-of-trade-driven restrictions in trade
volume.
58

To recall, contemporary trade agreements go much beyond traditional trade restrictions at

the border. They cover regulatory standards, health and safety rules, investment, banking
and finance, intellectual property, labor, the environment, and many other subjects.

59

Rodrik 2023, p.2.

60

The OECD study identifies issues arising in the assessment of those costs and benefits
and provides a critical review and the available empirical evidence. (Pohl, 2018).
61

Apart from the high level of sophistication in modelling, HT also provide extremely
useful discussion of the literature, compensation schemes and the policy implications.

62

Much of the debate is due to considerable disagreements about methodologies. For

example, and as noted by Cheong and Lee (2014), the fragility of WTO effect estimates
in the standard gravity model is mainly due to the multicollinearity between the
multilateral resistance terms and the WTO membership variable. See also Larch et al.
2029 for more insights about the methodological issues in these exercises.
63

It is clearly important to distinguish between the period 1980 to 2010, which was
characterized by a rapid growth of world trade, global value chains and the emergence of
South-East Asia as a major trading block and the following period, which major
structural changes affecting trade in intermediate goods. For more details see Annual
Reports of the WTO.

64

For a review see Bekker et al 2021. Both OECD and all the Bretton-Woods institutions
have also written numerous reviews.
65

See, for example, Martin (2010) and Amsden (2010).

66

See, for example, the recent debate in Peterson Institute of International Economics and
the Richard N. Cooper lecture of Laurence H. Summers. Summers (2023).
67

See, for example, Li and Shantong and Fan Zhai (2000).

68

See Rose (2010) and Larch et al. (2019).

69

See, for example, Drabek and Laird (2001) and the more recent paper by Jiangdong et al.
(2021).
70

There is a vast literature on those links, which were reviewed by the World Bank and
OECD as well as in various academic studies. A good example of such studies is Alcala
and Ciccione (2004) who provide a rigorous analysis of the link by controlling for
institutional quality as well as geography and by taking into account the endogeneity of
trade.
71

With regard to GVCs, proposals have been made to address policy uncertainties with two
strategies – switching to different suppliers or upgrading to more sophisticated structures.
72

It seems that the differences in countries are now channeled into the actual negotiations in
the WTO. The latest (13th) Ministerial Conferences, “Members, both individually and in
groups of members, have put forward many ideas on reform (of the WTO – ZD),
including in the form of proposals and submissions. These ideas cover issues such as
improving the deliberative functions of the WTO; institutional matters; transparency; the
working procedures of WTO councils and committees; development; and more general
proposals on overall reform of the organization. Others call for discussions on current
issues confronting some members such as the use of industrial subsidies, ensuring policy
 space to promote industrialization in developing countries, and making trade more
inclusive (WTO 13TH MC Briefing notes and Press Release 1 March 2024).
73

The sustainable development-related provisions include provisions related to labor

protection, human rights, gender, health, environment, and SMEs. ESCAP (2022).
74

Quoted by the Economist, 10 February 2024 in Chaguan).