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Developing countries sour on multilateralism
While political disputes over specific provisions in trade agreements are typical, developing countries’ recent opposition to an extended digital-tax moratorium is emblematic of a deeper problem. Many have concluded that the World Trade Organization no longer has anything to offer them – and they may have a point
Pinelopi Koujianou Goldberg 21 Mar 2024

Multilateralism is waning, and one of the world’s leading multilateral institutions, the World Trade Organization (WTO), is in crisis, because the United States has been blocking new appointments to its dispute settlement mechanism’s Appellate Body since 2018. In the run-up to the WTO’s 13th Ministerial Conference last month, some optimists hoped to see progress on specific issues, such as an agreement not to impose tariffs on digital commerce, but expectations were generally low.

The pessimists were right. India led the charge against extending a moratorium on e-commerce tariffs, and only a last-minute deal prolonged it for another two years. After that, it is expected to expire. India and its allies celebrated the outcome as a victory. For the first time in years, the culprit undermining the WTO was not the US but developing countries (including Indonesia, South Africa, Brazil, and others).

True, what happened with digital commerce is characteristic of the usual conflicts that play out during trade negotiations. Free trade always produces winners and losers. Digital commerce may be in the interest of businesses in advanced economies as well as consumers and businesses in low- and middle-income countries; users of an app, game or other software product made in a different country may pay lower prices in the absence of tariffs. But domestic producers will reliably demand protection from imports, and governments will see tariffs as a promising way to boost revenues.

While these issues are typical, developing countries’ opposition to an extended digital-tax moratorium is emblematic of a deeper problem: namely, the growing impression that the WTO has nothing to offer them anymore. The assumption is that it unilaterally serves the interests of big businesses rather than of the average person in a low- or middle-income country.

But is this true? In fact, recent research shows that poverty reduction in the past three decades has been more likely in developing countries that are well integrated into the international trade system – as measured by the number of signed trade agreements and access to large, lucrative export markets. In this sense, the multilateral trade system has indeed benefited the developing world.

International integration is particularly important for smaller economies. Unlike India and China, countries such as Thailand, Kenya, and Rwanda cannot fall back on large domestic markets. No wonder opposition to trade deals so often comes from larger developing countries such as India, Indonesia, and Brazil. They can afford to turn their back on international trade if the terms of the proposed deal are not enticing enough.

But even these countries appreciate the benefits of participation in global trade. India, for example, used the closing of the Ministerial Conference to reaffirm its commitment to negotiation and multilateralism, in principle. The question, then, is why developing countries have such a negative view of the WTO specifically.

Their dissatisfaction dates back to 1995, when the WTO succeeded the General Agreement on Tariffs and Trade. At the time, developing countries felt that they had just been pressured into signing a trade-related intellectual property rights agreement that would yield big payoffs for multinational corporations without offering many benefits to their own populations.

Another ongoing source of tension is agriculture, where developing countries traditionally have a comparative advantage. Existing trade agreements continue to permit high-income countries to subsidize local producers and impose tariffs on imports. Various other rules, escape clauses, and notification requirements have created de facto loopholes that only countries with abundant resources are able to exploit.

For example, fishing subsidies (another area of major contention) are permitted under certain conditions. But monitoring fishing stocks to prove that such conditions are being met is prohibitively expensive for most developing countries. They therefore have good reason to complain that international trade rules are biased against them.

Looking ahead, a potentially bigger issue concerns advanced economies’ efforts to link trade agreements to labour and environmental standards, such as through the European Union’s proposed carbon border adjustment mechanism. While well-intentioned, advanced economies must recognize that their efforts to address climate, labour and human-rights issues could have serious distributional consequences, potentially coming at the expense of many developing countries.

This is especially true of climate change. Low-income countries may have the most to lose from the consequences of climate change, but they are understandably reluctant to impede their own growth to fix a problem caused by richer countries’ past sins. Combine these concerns with high-income countries’ push toward “friend-shoring” (which implies more trade among rich countries, given the current geopolitical map), and today’s world starts to look even more like one where advanced economies are pitted against developing ones.

Ironically, the obvious way to avoid such division is to revive multilateralism. Now more than ever, the challenges we face are global in nature, and thus call for global solutions. But shared objectives, by definition, must account for the concerns of developing countries. That is what successful multilateralism has always demanded.

Pinelopi Koujianou Goldberg is a professor of economics at Yale University and a former World Bank Group chief economist and editor-in-chief of the American Economic Review.

Copyright: Project Syndicate

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