VoxEU Column Global governance

Fading Reciprocity: Challenges to Global Rules

Multilateral trade talks are stagnating while bilateral agreements being signed daily. This column considers why reciprocity seems to have lost its appeal.

These days the gap between the call for global rules or global governance on one hand and global rules in operation on the other hand is deeper than ever. Multilateral trade negotiations under the Doha Round are stagnating while bilateral agreements are mushrooming. Global rules for cross-border issues like environment or security have not yet been agreed upon not to speak of global rules for products traded on financial markets or for migration.

To understand the head- wind against global rules, one has to understand why its tail-wind has come to a standstill just in that issue in which it has been most powerful for many decades, that is in trade policy.  This tail-wind was reciprocity. Reciprocity prevents terms of trade losses incurred by a country which either lowers its tariff unilaterally without receiving concessions from trading partners or unilaterally sets its tariffs at a higher level than is efficient. Reciprocal agreements weaken domestic opposition against unilateral market opening and thus lead to lower tariffs. Why is it that reciprocity seemingly loses its appeal?

I see four major reasons. First, today many governments liberalise unilaterally because they face more pressure from vested interests pro market opening than from those against market opening. This is due to the slicing up of vertical cross-border value added chains, rising outflows of foreign direct investment in export-oriented activities, and more public awareness of the losses in competitiveness which sectors incur when other sectors remain protected. The latter holds, for instance, for the manufacturing sector which lobbies against the protection of agriculture or services. It is thus ever more difficult for protected sectors to justify privileged treatment when costs of protection are transparent and non-privileged sectors including taxpayers get informed about income foregone due to the protection of other sectors. To put it differently, the target of protection gradually shifts from a “GDP concept” (protecting factor income of residents and non-residents earned in the national territory) to a “GNI concept” (protecting factor income of residents earned worldwide). That makes reciprocal agreements between governments which traditionally  pursue the former concept less meaningful than in the past.   

Second, technological innovations have become an important driving force of exogenous market opening in a very uneven way between countries. This is because such innovations build upon a stock of physical, financial and personal infrastructure which not only is often very immobile but with which countries are also unevenly endowed. Innovations in cutting distance costs, for instance,  have different implications under Latin American or Asian conditions and also affect governments’ incentives towards policy reforms differently. Such disparities raise the heterogeneity of  negotiation partners and impede reciprocity. This is known from the GATT times when countries of similar size and income preferred to negotiate with each other  in order to receive the maximum of counterconcessions in exchange to their concessions (principal supplier rule). Homogeneity of negotiation partners facilitates reciprocity, but it is heterogeneity which is on the rise due to the spatially uneven spread of technological innovations (sometimes referred to as the “digital divide”).

Third, reciprocity faces head-wind when countries do not negotiate about reciprocally cutting border charges but – as in services – about very different often non-quantitative “behind the border” measures which subtly discriminate against foreign suppliers. Given both the difficulties to transform such measures in price equivalents and the resistance of governments against self-binding in a core field of national sovereignty (as they see it), such “behind border measures” are a difficult turf for reciprocal agreements.

Fourth, negotiations often mix up allocational targets with distributional targets and “non-trade” issues. Examples are strong infant industry protection elements in reciprocal trade negotiations with poor countries, the plethora of non-trade concerns in agriculture, or the discrimination of trade in services supplied by labour movement (mode 4 supply )against those supplied by capital movements (mode 3 supply). Distributional targets mean treating partners differently which is exactly the way to discredit reciprocity.

The four reasons spell bad chances for reciprocity to multilaterally regulate issues in which unilateralism, technological innovations spurring heterogeneity, “behind the border” measures, and distributive targets  are dominant. To different degrees, this is the case in trade with new financial service products like those which led to the outbreak of the sub-prime crisis, in environmental issues as well as in migration. In each of these issues, it is difficult to apply the GDP concept by defining the territory whose factors of production a national government wants to protect. Barriers between territories are getting porous while those between residents and non-residents may rise. The measures taken by the US administration to control the inflow of non-residents illustrate this point.  

What can be done to save reciprocity? To some extent, the question has already been answered by affirmative action. Heterogeneity of partners has been reduced by regionalism or bilateralism. In regional agreements, reciprocity is easier to enforce than multilaterally. The other avenue to reciprocity is to reduce the heterogeneity of issues. The single undertaking procedure of the WTO is a moribund concept. In future, issues of negotiations will be smaller in scope and more transparent in their implications. That speaks for negotiations on market access rather than on national treatment,  for many separate negotiations on narrow issues rather than for one single “grand design” negotiation, and, finally, for keeping allocational and distributional targets separate. Such a detour via larger homogeneity of partners and issues (and thus via agreements between fewer partners and on fewer issues) can have a good payoff on the way to more reciprocity. It would follow the road which Richard Baldwin recently labeled “multilateralising regionalism”.

420 Reads